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Global value chains, financial constraints, and innovation

Author

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  • Rawan Elshaarawy

    (Egyptian Competition Authority)

  • Riham A. Ezzat

    (Cairo University)

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.

Suggested Citation

  • Rawan Elshaarawy & Riham A. Ezzat, 2023. "Global value chains, financial constraints, and innovation," Small Business Economics, Springer, vol. 61(1), pages 223-257, June.
    • Handle: RePEc:kap:sbusec:v:61:y:2023:i:1:d:10.1007_s11187-022-00685-8
    DOI: 10.1007/s11187-022-00685-8
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    1. Odei, Samuel Amponsah & Ardito, Lorenzo & Soukal, Ivan, 2024. "The impact of capacity utilisation on product innovation in emerging economies: The moderating effects of firm ownerships," Technological Forecasting and Social Change, Elsevier, vol. 208(C).
    2. Du, Wenjing & Fang, Guanfu & Gao, Tiantian & Jiang, Wei, 2023. "Public credit institutions, export activities, and global value chain participation: Evidence from China's credit demonstration city construction program," Economic Modelling, Elsevier, vol. 126(C).

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    More about this item

    Keywords

    Global value chain; Financial constraints; Innovation; Extended probit model;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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