This paper examines the association between participation in global value chains and financial globalisation measured by international net and capital flows. The results show that financial globalisation and the rise of global value chains are related but not two sides of the same coin. In fact, we find that GVC participation is positively associated with equity capital flows but negatively associated with debt capital flows. We also study the association of GVC participation and capital flows with aggregate economic outcomes. The findings show that both GVC participation and equity flows affect the share of mortgage and business credit. But we uncover also important differences in the impact of capital flows between advanced and emerging countries. Regarding changes in the economic structure our results suggest a positive association of both GVC participation and equity inflows on the manufacturing share, while debt inflows are primarily associated with a growth of the service sector in advanced economies, but not in emerging and developing countries. The finding that there is no strong association between the globalisation indicators and innovation suggests that the fragmentation of value chains leads to functional specialisation in tasks and tends to weaken the link between innovation and production at country level. We find in addition that a higher GVC participation is weakly associated with a higher growth of government revenue, as are debt flows but only in advances countries. This finding suggests also that debt flows were redirected primarily into safe countries in advanced countries.
The link between financial globalisation and integration into global value chains and macroeconomic impacts
working paper 23/2021