Financial Development and African Participation in Global Value Chains

Abstract

This paper investigates the contribution of financial development for African countries’ participation in global value chains (GVCs). It relies on a review of the theoretical and empirical literature that can shed light on the mechanisms whereby financial development affects value-added trade. A panel econometric analysis covering 36 African countries between 2000 and 2018 supplements the theoretical analysis. Data used for this empirical analysis comes from the WDI (2018), UNCTAD_EORA (The Eora Multi-Region Input-Output Database, 2018) and UNDP (2018) databases. The Financial Development Index is a multidimensional synthetic index constructed by the IMF (2018). Theoretical analysis shows that very little work has addressed this issue, although there is considerable evidence that financial development has a positive impact on the conditions for participation in and upgrading within a GVC. As for the empirical results, they reveal that financial development increases the participation of African countries in GVCs. However, some dimensions of financial development do not have a positive effect. Moreover, regional features are important in understanding the relationship between financial development and value-added trade. This research is therefore a useful tool for decision-making in promoting financial development for deeper African countries’ participation in GVCs.