Productivity, financial constraints, and firms' global value chain participation: Evidence from China

We calculate the foreign value-added ratio (FVAR) to measure the global value chain (GVC) participation of Chinese exporting firms from 2000 to 2006. Motivated by the heterogeneous firm model of trade, we empirically explore the effects of firm productivity and financial constraints on firms' GVC participation. We find that (1) productivity increases and financial constraints reduce FVAR; (2) productivity affects FVAR for both first-time and continuous exporters, while financial constraints only significantly affect first-time exporters; and (3) financial constraints dampen the positive effect of productivity on FVAR. Our findings thus suggest that productivity and financial constraints play important roles in determining firms' GVC participation.