Global value chains, financial constraints, and innovation

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.

Value Chain Digitalization, Global Value Chain Embeddedness, and Distributed Innovation in Value Chains

“…Financial constraints (FC). Many studies indicate that firms faced with severe financial constraints are less inclined to make R&D investment [102]. We controlled the perceptionbased financial constraint, which was a dummy variable measured as 1 if the firm perceived access to finance as its biggest obstacle, and 0 otherwise.…”

“…This model provides several advantages: (1) it allows the inclusion of multiple endogenous variables such as value chain digitalization and GVC embeddedness; (2) the use of binary endogenous regressors like GVC embeddedness is available; (3) the function to handle the use of endogenous covariates in the interaction. According to Elshaarawy and Ezzat [102] and Li and Zhang [104], the instrumental variable for GVC embeddedness can be a dummy variable with the value one if the firm perceives and trade regulations as the biggest obstacle, and zero otherwise. The instrument for value chain digitalization is the average value of value chain digitalization in the same subindustry within the same city.…”

Las políticas de desarrollo productivo frente a los nuevos imperativos de las cadenas globales de valor

“…El acceso al crédito ayuda a potenciar el acceso a CGV para las PYMES (Kummritz et al, 2017) y permite mejorar la calidad de su participación (Elshaarawy y Ezzat, 2022).…”

GVC embeddedness and innovation performance – an analysis across 28 European countries

“…While it has been proposed that GVC participation and innovation performance are related to each other, empirical research into this area remained surprisingly scarce (Elshaarawy and Ezzat, 2022). As Elshaarawy and Ezzat (2022) note, the literature connecting GVC participation and organizational innovation to date is largely theoretical. The only exceptions of empirical investigations of innovation that they mention are Dang and Dang (2020) and Tajoli and Felice (2018).…”

“…The need to investigate the link between GVCs and innovation performance is further stressed, as it is also debated whether there is a positive or a negative link between GVCs and the innovation performance of organizations as well as how these relationships are explained. The literature mainly emphasizes positive effects of GVCs, and empirical results also point in that direction (Van Assche, 2017;Elshaarawy and Ezzat, 2022). Offshoring and outsourcing of activities imply that organizations can use their remaining resources to innovate and that organizations gain by upgrading their technology and knowledge via external linkages (Bardhan and Jaffee, 2005;Phene and Almeida, 2008;Pietrobelli and Rabellotti, 2011).…”