Does real exchange rate devaluation improve participation in global value chains?

Purpose The undervaluation of the real exchange rate can influence the performance of developing countries' exports and participation in global value chains. Thus, the study aims to investigate the impact of this policy on Egypt's involvement in both backward and forward global value chains, as well as its conventional trade. Design/methodology/approach: Utilizing the Autoregressive Distributed Lag model over the period 1990–2022. Findings: The results indicate that Currency undervaluation displays a negative impact on Egypt's involvement in global value chains. Consistent with traditional trade theory, undervaluation harms participation in backward GVCs. While the adverse effect on forward linkages may seem inconsistent with traditional trade theory. Nevertheless, this outcome aligns with the fundamental notion that domestic and foreign value-added in GVCs are complementary in the production process; consequently, the rising cost of imported intermediate inputs results in a reduction in output and exports. Regarding the effect of undervaluation on conventional trade, the results indicate that devaluation with digitalization policies has a beneficial impact on trade, as it increases exports and decreases imports. Originality/value– The paper builds on previous empirical work in this field and fills a knowledge gap by examining the impact of devaluation on Egypt's GVCs involvement and conventional trade. The study's findings could potentially spur policymakers to maintain currency stability, develop strategies and policies to foster innovation and localize technology, reforming educational systems to align with labor market demands, Improving institutional quality and reducing administrative burdens, maximizing commercial representation in African markets.