The hypothetical example of Mozambique suggests that if the country increased its rule of law index to the cross-country median, its backward GVC participation would grow by 40 percent and its exports would grow by 42 percent, at the sample mean of sectoral contractual intensity (Fernandes et al. 2022). Institutional quality therefore also facilitates sector reallocation towards sectors that are more contract intensive.

In addition, the role of institutional quality matters more strongly for the import content of exports (backward GVC participation) than for total exports across countries (Fernandes et al., 2022). One key factor is that GVC trade is characterized by intense firm-to-firm interactions including contracting, specialized products and investment (such as for the customization of products) and the exchange of large flows of intangibles (such as technology, intellectual property, and credit) (Antràs 2016; 2020). The protection of intangibles, such as patents, trademarks, copyrights, industrial processes, and designs, is particularly relevant for factory-less and innovative goods producers, such as Nike and Apple (Asian Development Bank et al., 2021).

There is also a role for regional trade agreements, as discussed as part of countries’ trade policy options, in improving institutional quality, especially those with deep provisions in areas such as regulating competition law or services and protecting intellectual property rights. This is because such trade agreements import both reform and technical and financial assistance and have shown to strengthen GVC participation. The number of provisions in deep trade agreements increases for countries participating in more sophisticated GVCs and is highest for those specialized in innovative activities, and so does political stability (World Bank, 2020). These findings reinforce the role of institutional quality in shaping comparative advantage.

# **5.2 Connectivity to Facilitate Movement of Traded Goods and Services**

Physical and digital connectivity and infrastructure and other measures facilitating trade flows at the border or behind help lower trade costs, thus facilitating the movement of traded goods and services and lowering effective distance to key markets. High transport costs remain key obstacles to GVC participation, according to surveys of developing country suppliers (OECD and WTO, 2013). Other findings suggest that unpredictable land transport hinders most Sub-Saharan African countries from participating in the electronics GVC (Christ and Ferrantino, 2011). Better infrastructure – including communication, electricity, roads, and power – and GVC participation in manufacturing are positively associated (Cheng et al., 2015).

Estimates of the ad valorem equivalent of transit delays highlight the huge potential for connectivity improvements to reduce trade costs. One day of delay in transit due to a different transport mode choice has an ad valorem equivalent of 0.6 to 2.1 percent, with trade in parts and components being the most sensitive (Hummels and Schaur, 2013). Similar magnitudes for the cost of a one-day delay in inland transit are suggested by Djankov, Freund, and Pham (2010). Similarly, research finds that logistics performance matters more strongly for trade in parts and components than for trade in final goods (Ansón et al., 2017).

Improving trade facilitation by streamlining border procedures boosts trade integration by lowering trade costs. Estimates suggest that one third of the observed increase in GVC trade—which focuses on the role of intermediates—over the 2015 to 2019 period can be attributed to improvements in trade facilitation (Shepherd 2022). These improvements focused on increased implementation of the WTO Agreement on Trade Facilitation, emphasizing the potential to move forward on trade facilitation measures in order to promote access to imported intermediates.

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