Exporter dynamics in global value chains: Evidence from catching-up members of the European Union

Global value chains (GVCs) are the dominant feature of current international trade, and their expansion has changed traditional understanding of the mechanisms of international trade patterns. Economic growth and the catching-up process through international trade has also been affected by expansion and deepening of GVCs. Participation in GVCs brings opportunities to gain new technology and knowledge from foreign clients and suppliers necessary for upgrading and building longer-term productive capabilities. On the other hand, the participation in GVCs also has a potential risk for a majority of domestic small firms in the form of fewer opportunities to grow or upgrade, and greater vulnerability to business cycles (UNCTAD (2013)). This paper aims to identify factors that facilitate the catching-up process for newer members of regional economic integration. We examine the effects of participation on the evolution of export markets and firms’ entry, exit and survival in well-developed GVCs in regional economic integration by taking catching-up member states of the European Union (EU) as an example. Based on a theoretical framework with heterogeneous firms, we analyze the effect of various types of demand shocks from the participation in GVCs, particularly forward linkages in GVCs, on firms’ survival and growth. In addition, by utilizing the World Bank’s exporter dynamics database and the Eora multi-regional input-output (MRIO) database, we examine the effects of various types of participation in GVCs on exporter behavior in catching-up member states of the EU at the industry level. On the basis of theoretical and empirical analysis, we verify the conditions necessary for newer members of the EU to develop and increase trade in order to catch-up with the preceding members in expanding and deepening GVCs.