Over the past two decades, global value chains (GVCs) have emerged as a key mechanism for industrial upgrading and export diversification in developing economies, yet the extent to which foreign direct investment (FDI) promotes GVC integration remains contingent on institutional quality. This study aims to investigate the impact of FDI inflows on backward and forward GVC participation in Asia-Pacific countries from 2008 to 2020, with particular attention to the moderating roles of regulatory quality (REG) and government effectiveness (EFF).
Using Organisation for Economic Co-operation and Development's trade in value-added data and employing fixed-effects and two-step system-generalized method of moments estimations to address unobserved heterogeneity and endogeneity, the results reveal an asymmetric effect: FDI enhances forward participation by increasing domestic value-added in partner exports while reducing backward participation through substitution of imported intermediates.
Importantly, REG – rather than government EFF – conditions these effects, with stronger regulatory frameworks moderating both the positive and negative impacts of FDI. Subsample analysis further highlights a heterogeneous pattern: Association of Southeast Asian Nations (ASEAN) countries benefit from FDI-driven upstream integration, while non-ASEAN members face crowding-out effects unless institutional quality is high. These findings underscore the need for regionally tailored policy responses, where improving regulatory environments is critical to fully leverage FDI for sustained and balanced GVC integration in the Asia-Pacific.
The study is novel in revealing the critical role of institutional quality, focussing on REG and government EFF in optimizing FDI spillovers for Asia-Pacific economies, particularly developing economies in the Regional comprehensive economic partnership bloc. Policy recommendations call for targeted reforms to improve regulatory frameworks and governance efficiency, enabling deeper integration into GVCs and greater domestic value addition across the region.
