The Global Value Chain Under Imperfect Capital Markets

22 Pages Posted: 7 Jun 2020

See all articles by Jaerim Choi

Jaerim Choi

University of Hawaii at Manoa - Department of Economics

Date Written: February 2020

Abstract

This paper develops a model to study how suppliers' financial constraint 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 (Econometrica, 2013, 81, 2127), 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 US intrafirm trade data for the years 2000–10, 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.

Keywords: global value chain, imperfect capital markets

Suggested Citation

Choi, Jaerim, The Global Value Chain Under Imperfect Capital Markets (February 2020). The World Economy, Vol. 43, Issue 2, pp. 484-505, 2020, Available at SSRN: https://ssrn.com/abstract=3621039 or http://dx.doi.org/10.1111/twec.12897

Jaerim Choi (Contact Author)

University of Hawaii at Manoa - Department of Economics ( email )

Honolulu, HI
United States

HOME PAGE: http://www.jaerimchoi.com/

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