Implications of Foreign Direct Investment, Capital Formation and its Structure for Global Value Chains


Amat Adarov and Robert Stehrer

wiiw Working Paper No. 170, November 2019
58 pages including 25 Tables and 16 Figures

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In 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) and trade in value added at country and sectoral levels based on a database constructed for a sample of European countries over the period 2000-2014. The analysis reveals that inward FDI is especially conducive to the formation of backward linkages while outward FDI facilitates forward GVC participation, especially in high-tech manufacturing sectors. A particularly robust influence of FDI and capital accumulation on GVC integration is identified in the textile and clothing industry. While capital accumulation in general intensifies GVC linkages for most sectors, ICT capital appears to be especially instrumental for backward integration of electrical and transportation equipment sectors.

Financial support from the Joint Research Centre (JRC) of the European Commission is gratefully acknowledged (grant contract number 936041 - 2018 A8 AT).


Keywords: global value chains, value added trade, foreign direct investment, capital, capital composition, gravity model, fractional response model

JEL classification: F14, F15, F21, E22

Countries covered: EU-28, Japan, USA

Research Areas: Macroeconomic Analysis and Policy, International Trade, Competitiveness and FDI