The Global Value Chain under Imperfect Capital Markets

This paper develops a model to study how suppliers’ financial constraints 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 (2013), 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 U.S. intrafirm trade data for the years 2000–2010, 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.