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The global value chain under imperfect capital markets

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  • Jaerim Choi

Abstract

This paper develops a model to study how suppliers' financial constraint interact with suppliers' position in a global value chain. I embed financial frictions into the property‐rights model of the global value chain, as in Antràs and Chor (Econometrica, 2013, 81, 2127), to derive the optimal allocation of ownership rights along the global value chain. The model predicts that multinational firms are more likely to integrate downstream intermediate input suppliers in countries with weak financial institutions when the production process is sequential complements. Using US intrafirm trade data for the years 2000–10, together with a triple‐interaction term between "downstreamness" of an industry, demand elasticity of an industry and financial development of a country, I provide empirical evidence that supports the key prediction of the model.

Suggested Citation

  • Jaerim Choi, 2020. "The global value chain under imperfect capital markets," The World Economy, Wiley Blackwell, vol. 43(2), pages 484-505, February.
    • Handle: RePEc:bla:worlde:v:43:y:2020:i:2:p:484-505
    DOI: 10.1111/twec.12897
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    Cited by:

    1. Choi, Jaerim & Hyun, Jay & Park, Ziho, 2024. "Bound by ancestors: Immigration, credit frictions, and global supply chain formation," Journal of International Economics, Elsevier, vol. 147(C).
    2. Mikhail Vyacheslavovich SHATUNOV, 2024. "The Impact of Government R&D Subsidies on Participation in GVCs," Russian Foreign Economic Journal, Russian Foreign Trade Academy Ministry of economic development of the Russian Federation, issue 9, pages 90-97, September.
    3. Karabay, Bilgehan, 2022. "A new dimension in global value chains: Control vs. delegation in input procurement," Journal of International Economics, Elsevier, vol. 137(C).
    4. Maria Cipollina & Filomena Pietrovito & Alberto Franco Pozzolo, 2021. "Do cross‐border mergers and acquisitions reflect participations into global value chains?," The World Economy, Wiley Blackwell, vol. 44(11), pages 3168-3201, November.
    5. Brei, Michael & Ferri, Giovanni & Gambacorta, Leonardo, 2023. "Financial structure and income inequality," Journal of International Money and Finance, Elsevier, vol. 131(C).

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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