GVC and credit risk in times of exogenous shocks

This paper aims at investigating the relationship between firm’s participation in global value chains (GVC) and its credit risk, measured through delayed and overdue obligations and insolvency risk. Borrowing from the existing literature, the hypothesis under scrutiny is that GVC participation positively affects firm’s performance in terms of credit risk. To empirically test this hypothesis, we adopt survey data from the World Bank, integrating information on firms’ financial performances during the COVID-19 pandemic with their pre-pandemic GVC involvement. Our dataset includes more than 10,500 firms operating in 30 countries, over the years 2019 and 2021. We adopt a probit model to estimate the impact of GVC participation on the probability of experiencing payment delays, overdue payments, and insolvency risk, while controlling for relevant firm-specific characteristics. To address potential endogeneity concerns, we implement a recursive bivariate probit model, which allows us to examine both the direct and indirect effects of GVC participation. Our empirical findings demonstrate that firms with higher levels of international orientation exhibit a lower probability of experiencing credit repayment difficulties and insolvency risk. We find that GVC participation reduces the probability of delayed payments by 8%, overdue payments by 3%, and insolvency risk by approximately 2%. JEL classification: F23, F61, G32