Bringing economic freedom back to the study of global value chains: empirical evidences from heterogeneous panel data approach

Recent theoretical work shown the traditional measures of institutions to facilitate in Global Value Chains (GVCs) participation, however, little are known empirically about the importance of non-traditional institutional measures for the facilitation in Global Value Chains participation across countries. This paper makes a significant contribution to filling these gaps in the literature by using an instrumental approach for non-conventional institutional measures, supplemented by the economic freedom index and each of its individual dimensions among the regressors and standard controls, and a data set of sixty countries covering the years 2000 to 2018. To account for potential endogeneity of institutional measures and for other regressors, we apply GMM estimators and the findings reveal that participation in Global Value Chains is positively affected by economic freedom index and these findings are robust with both behind-the-border facilitation and at-border facilitation. Except access to sound money, all other institutional indicators are positively associated with participation in Global Value Chains. These findings imply that strengthening a country’s participation in global value chains can be accomplished by ensuring the integrity of its legal and economic institutions.