Global value chains, financial constraints, and innovation

Rawan Elshaarawy () and Riham Ezzat
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Rawan Elshaarawy: Egyptian Competition Authority

Small Business Economics, 2023, vol. 61, issue 1, No 10, 223-257

Abstract: Abstract This paper analyzes the effect of firms engaging in global value chains (GVCs) and suffering from financial constraints on innovation. To explore this relationship, this study relies on firm-level data from World Bank Enterprise Surveys (WBES) for 146 countries during the period between 2006 and 2020. The aim of this paper is to empirically link two literature strands, the one of GVC participation and that of financial constraints, and to examine their individual effects, in addition to the effect of their interaction on innovation. Extended probit model is used to account for the endogeneity problem that may arise when studying the effect of GVC participation and financial constraints on innovation, by using a set of instrumental variables. This paper controls for heterogeneity among firms (by country, region, and industry), firms’ characteristics, reverse causality, and sample selection. The results of this paper show that financial constraints impede firms’ probability of innovation even if the firm is participating in GVC. This means that the negative effects of financial constraints outweigh the positive effects of GVC participation on innovation.

Keywords: Global value chain; Financial constraints; Innovation; Extended probit model (search for similar items in EconPapers)
JEL-codes: C25 D22 F14 F65 O30 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11187-022-00685-8

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