Unravelling the GVC ‐Finance Nexus: Divergent Effects in Developed and Developing Economies

ABSTRACT

This study examines the impacts of GVC participation and its components on financial development across 55 economies from 2000 to 2018. Grounded in the openness theory of financial development, we employ panel fixed effects, panel quantile regression and dynamic panel threshold regression to analyse how GVC integration through trade openness, financial openness, and demand for financial services influences financial development. Our results show that GVC participation has a positive and significant influence on financial development regardless of a country's existing financial market development, though the effect diminishes at higher quantiles. The dynamic panel threshold regression reveals a clear dichotomy: GVC participation is positively associated with financial development in lower growth economies but negatively associated with it in higher‐growth economies. We verify the robustness of this dichotomy by classifying economies as advanced or emerging using the IMF World Economic Outlook classification. The bootstrap bias‐corrected fixed‐effects results, estimated separately for each income group, corroborate the divergent effects documented in the main analysis. Additionally, we employ domestic credit to the private sector, the Financial Markets Index, and the Financial Institutions Index as alternative proxies for financial development, all of which confirm the baseline findings. Our results underscore the need for tailored GVC strategies across different stages of economic development.