Firms' political connections and global value chains: evidence from Egypt

in: Emerging Economies No.20

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An increasing part of today’s international trade takes the form of Global Value Chains (GVCs). According to the estimations of the OECD, about 70% of international trade involves GVCs, as raw materials, intermediate goods, and services cross the borders several times to be incorporated into the final product. GVC activities are also affected by the firm’s decision to outsource parts of the production process or invest in other countries where there is a comparative advantage related to costs or factor endowments. GVCs represent therefore a promising opportunity for developing countries to find a place in the international market by producing and exporting along these chains, to attract foreign investments if their markets are competitive, and to harmonize production standards and acquire international certifications. This will help them increase and diversify their exports and export destinations.The determinants of one country’s participation in GVCs is therefore not only related to its production and export structure, but also to its overall investment climate and trade policy in place (Dovis and Zaki, 2020). The quality of institutions and the prevalence of informal practices and corruption also affect the overall transparency and competitiveness of markets and firms’ potential engagement in GVCs. The Egyptian case is of particular interest. In fact, the country’s integration in GVCs remains relatively limited. Despite serious investment and trade policy reforms, Egypt -as the rest of the MENA region- continues to perform weakly in international trade. Compared to other regions, the MENA region has a modest share of firms that are large and/or productive enough to engage in GVCs. In this article, we explore the reasons behind Egypt’s weak GVC integration by focusing on trade policy and political connections and propose policy recommendations to overcome these obstacles.