Financial Constraints and Firms' Productivity: The Role of Participation in Global Value Chains

Building on the predictions of several research strands and using data from the EU-EFIGE/Bruegel-UniCredit dataset on European firms, this paper analyses the mediating effects of Global Value Chains (GVCs) participation on the link between financial constraints and productivity in the wake of the "Great Recession" (2009-2014). Consistent with previous research, our results indicate a negative relationship between financial constraints and productivity while suggesting that GVC involvement enhances firms' performance. Additionally, we find that for firms engaged in GVCs exclusively as exporters or importers, the potential benefits of trading with international partners may mitigate the adverse impact of borrowing restrictions on productivity. However, this effect appears to be amplified for firms involved in two or more international activities, likely due to the heightened risks they face, which can exacerbate their financial standing. As a policy recommendation of our study, authorities should encourage participation in GVCs while implementing initiatives and programs to facilitate firms' access to external financing.