Global economic sanctions, global value chains and institutional quality: Empirical evidence from cross-country data

The present paper applies a modified gravity model to examine the relationship between global economic sanctions (GES) and global value chains (GVC) by using a dyad panel dataset of 38 developed and 28 developing countries during the 2005–2015 period and the rich and updated database of the Global Sanction Database version 2 (Felbermayr, G., A. Kirilakha, C. Syropoulos, E. Yalcin, and Y. V. Yotov. 2020. “The Global Sanctions Data Base.” European Economic Review 129: 1–23. doi:10.1016/j.euroecorev.2020.103561; Kirilakha, A., G. Felbermayr, C. Syropoulos, E. Yalcin, and Y. V. Yotov. 2021. The Global Sanctions Data Base: An update that includes the years of the Trump presidency. The Research Handbook on Economic Sanctions, Edited by Peter AG van Bergeijk.). GVC participation is classified into the source of the value-added as incorporated in exports, looking both backward and forward from the view of a reference country. With distinct econometric techniques and empirical estimation strategies, our empirical results document a negative association between GESs and GVC, including backward and forward linkages. This marginal effect of sanction on backward GVC is more sizable than those on forward GVC. Furthermore, the GES-GVC nexus is only evident in the case of developing countries, while the effects of sanctions are found to be small or statistically insignificant in the developed countries. However, these marginal effects of sanctions become less sizable if the target country develops a well-developed institutional system.