Trade-Related Government Expenditure and Developing Countries’ Participation in Global Value Chains

Abstract

The effect of trade-related government expenditure on backward and forward participation in global value chains (GVCs) is at the heart of the present analysis. The latter builds on an unbalanced panel dataset of 74 developing countries over the annual period from 2005 to 2018. It has used several estimators, the primary one being the Quantile via Moments approach. The outcomes suggest that trade-related government expenditure exerts no significant effect on countries’ forward participation in GVCs. At the same time, countries located in the 20th to 90th quantiles experience a positive and significant effect of trade-related government expenditure on backward participation in GVCs, with the magnitude of this positive effect being larger for countries in the upper quantiles than for countries in the lower quantiles. The least integrated countries into the backward participation in GVCs (i.e., those in the 10th quantile) experience no significant effect of trade-related government expenditure on backward participation in GVCs. Interestingly, expenditure in favour of developing economic infrastructure, and expenditure for enhancing productive capacities reinforce each other in positively affecting backward GVC participation by countries located in the upper quantiles (i.e., the 50th to 90th quantiles). However, the interaction between these two types of trade-related government expenditure does not influence countries’ forward participation in GVCs. These findings shed light on the importance of trade-related expenditure for enhancing developing countries’ participation in backward GVCs.