Implications of foreign direct investment, capital formation and its structure for global value chains

Abstract

AbstractIn the age of globalisation, international trade and foreign direct investment (FDI) have become integral elements of cross‐country production sharing. In this paper, we empirically assess the impact of FDI, as well as capital dynamics and structure on the formation of global value chains (GVC) at country and sectoral levels based on a sample of European countries over the period 2000–2014. We find a strong impact of FDI and capital accumulation on GVC participation: inward FDI is especially conducive to the formation of backward GVC linkages, while outward FDI facilitates forward GVC participation, especially in high‐tech manufacturing sectors. A particularly robust positive impact of FDI and capital accumulation on GVC integration is identified in the textile and clothing industry. While capital accumulation in general intensifies cross‐border production sharing for most sectors, ICT capital is especially instrumental for backward GVC integration of electrical equipment, transport equipment and chemicals sectors.