Abstract
This paper investigates whether firms’ participation in the global value chain (GVC) weakens the exchange rate risk and its mechanism. Based on Powers and Riker’s (2013) expanding exchange rate risk model, this paper matches data from China’s refined input-output table, the customs database, and the industrial enterprise database from 2002 to 2009 to measure the firms’ GVC forward linkages and backward linkages and therefore empirically tests the relationship between participation in the GVC and the exchange rate risk. The results show that participation in the GVC reduces firms’ exchange rate risk through a “comovement effect” for forward linkages and a “hedging effect” for backward linkages; differences in a firm’s position in the GVC affect the extent of reduction in the exchange rate risk. Encouraging firms to participate in the GVC and strengthening GVC relationship with high-income countries in particular play an important role in minimizing the exchange rate risk.
Highlights
In recent years, it has been debated whether the exchange rate risk has been weakened [1]
For a 10% increase in backward linkages, trade elasticity will decrease by 0.26%, which means the exchange rate risk faced by firms will decrease. erefore, with the increase in backward linkages, the global value chain (GVC) “comovement effect” will continue to weaken firms’ exchange rate risk
We introduce the interaction of total factor productivity (TFP) and the exchange rate in the regression model to see whether the regression coefficient of GVC forward and backward linkages is still significant
Summary
It has been debated whether the exchange rate risk has been weakened [1]. From the output perspective, participating in the GVC will weaken the exchange rate risk through the “comovement effect”; as opposed to the traditional trade model that regards all exported products as final consumer goods, the GVC network divides exported products into final products and intermediate products [9]. When the firm’s upstreamness (firmupit ≥ 1) is equal to 1, exports are only made up of final goods and the price index effect is 0, which means that the “comovement effect” caused by the forward linkage in the GVC is 0. E larger the upstreamness, the greater the share of export intermediates and the greater the “comovement effect”; the more negative the price index effect, the greater the buffer effect on the exchange rate risk. The statistical description and correlation matrix of the above variables are shown in Tables 1 and 2
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