Does over-regulation and outward FDI deter global value chain participation in regional trade agreements?

Nida Rahman () and Krishan Sharma ()
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Nida Rahman: School of Business, University of Petroleum and Energy Studies
Krishan Sharma: School of Management, Bennett University

International Economics and Economic Policy, 2025, vol. 22, issue 4, No 2, 23 pages

Abstract: Abstract This study investigates whether over-regulation and outward foreign direct investment (OFDI) deter global value chain (GVC) participation within the three largest regional trade agreements (RTAs): the European Union (EU), Regional Comprehensive Economic Partnership (RCEP), and the United States-Mexico-Canada Agreement (USMCA). The paper explores two key questions: (1) How do capital flows, including inward and outward FDI, influence GVC participation across these RTAs? (2) What role does institutional quality, particularly regulatory quality and government effectiveness, play in GVC integration? Using panel data for 43 countries from 2008 to 2020 and employing a panel regression model with panel-corrected standard errors (PCSE), the analysis finds that capital flows exhibit limited influence on GVC participation, suggesting that pre-existing production networks within these RTAs reduce the need for additional FDI inflows or outflows. However, institutional quality plays a significant and nuanced role. In RCEP, government effectiveness negatively impacts backward participation but enhances forward participation, while excessive regulation hinders GVC engagement. The EU exhibits an inverted U-shaped relationship between regulatory quality and GVC participation, indicating that excessive compliance costs deter integration. In USMCA, regulatory factors have minimal impact. Policy recommendations emphasize streamlining regulations in RCEP, balancing compliance costs in the EU, and enhancing supply chain infrastructure in USMCA to sustain GVC competitiveness.

Keywords: Global value chain; Inward foreign direct investment; Outward foreign direct investment; Regulations; Regional trade agreements (search for similar items in EconPapers)
JEL-codes: F0 F1 F2 F21 F23 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10368-025-00676-6

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