Speed of convergence in global value chains: Forward or backward linkage

Abstract

The COVID-19 pandemic is creating uncertainty that potentially causes a decline in global trade. It hampers the catching-up processes of developing countries because they are already connected through global value chains (GVCs). This study investigates the speed of convergence in GVC participation. Furthermore, we propose a forward and backward GVC participation approach to trace domestic and foreign value-added contributions and to overcome overvaluation in gross exports. We compare forward and backward linkages and determine countries’ convergence speeds. We scrutinize stochastic, σ, and β-convergence using the system generalized method of moments; additionally, we use this method to address potential endogeneity issues. Using a dynamic panel approach, we investigate global convergence countries in GVCs and possible foreign direct investment (FDI) factors that may influence convergence. In addition, we analyze the early effect of the COVID-19 pandemic on the convergence rate using the recent Asian Development Bank multi-regional input-output database that covers the period 2010–2019. The results illustrate convergence in both forward and backward GVC participation; however, the convergence speed varies among group countries. A group comprising countries in the Association of Southeast Asian Nations and other countries experiences faster convergence than advanced countries in forward GVC participation. In contrast, advanced countries experience faster convergence in backward GVC participation. Furthermore, the results reveal that FDI plays a significant role in GVC participation. Overall, The COVID-19 pandemic has decreased GVC participation on average.