Do public procurement contracts enhance firms’ involvement in global value chains? Evidence from developing countries

PurposeThis study aims to examine the influence of public procurement contracts on firms’ participation in global value chains (GVCs) in developing countries. It further investigates the mediating role of these contracts in alleviating financial barriers to global value chain participation.Design/methodology/approachThis study uses probit and recursive bivariate probit models to analyse cross-sectional data from the World Bank Enterprise Surveys (WBES), covering 121 developing countries between 2008 and 2023.FindingsThe study finds that securing or attempting to secure a public procurement contract increases firms’ participation in GVCs across developing countries. These findings are more pronounced for older and larger firms. The results also show that public procurement contracts alleviate the credit constraints that hinder firms’ participation in GVCs. The findings were subjected to several robustness tests, including controlling for four business obstacles, using alternative measures of global value chain participation, using a two-step probit selection model and propensity score matching method, controlling for six regional dummies and using an alternative instrumental variable.Social implicationsFirst, governments in developing countries should allocate more money to buy from private firms. the findings on the interaction between government contracts and credit constraints suggest that governments should encourage the financial sector to accept using government contracts as collateral to lend to supplier firms. Public procurement contracts act as a certificate to signal the creditworthiness of supplier firms and reduce the information asymmetry about these firms (Dai et al., 2021). Public procurement contracts can be the only resort to be financially stable and overcome multiple market failures. The underdevelopment of the financial sector in developing countries is a severe problem that can be mitigated by the usage of government contracts as collateral to provide private firms with funds.Originality/valueThis study fills a gap in the literature by being the first to explore the relationship between public procurement contracts and participation in GVCs. No prior empirical studies have examined this relationship. Furthermore, it is the first to investigate how public procurement contracts mitigate the adverse effects of credit constraints on firms’ participation in GVCs.