versus relational transactions, thereby allowing one to construct broad industry-level measures of relational GVC participation for the comprehensive set of countries in the Eora Global Supply Chain Database. Due to time constraints, such analysis was not conducted in time for the 2020 World Development Report, but hopefully it will be carried out in future work.

# 4.2 Determinants of GVC Participation

In a world of relational GVCs, the effect of factor endowments on GVC participation is largely analogous to the one developed above for the broad notion of GVCs (both at the country-industry and at the firm level). A key novel aspect, however, is that as mentioned above, the relational approach to GVCs provides a straightforward explanation for why GVC activity and FDI flows go hand in hand. When tight control over foreign production processes is necessary (perhaps because the legal environment does not suffi ce to discipline the behavior of suppliers or to avoid the leakage of intellectual property), lead firms might decide to rely on integrated suppliers and assemblers in foreign countries. This results in intrafirm trade and FDI flows. For this same reason, countries that put in place policies that are FDI friendly (such as establishing credible mechanisms to reduce the risk of expropriation or offering tax breaks for new investments by foreign companies) are more likely to be able to participate in GVCs.

The stickiness of relational GVCs also makes them particularly vulnerable to supply chain disruptions. For this reason, firms participating in relational GVCs are likely to be particularly sensitive to the availability of skilled labor in the economies in which they operate. Furthermore, in relational GVCs, informational flows and communication are particularly important, which suggests that language skills (such as a good command of English as a second language) might be particularly relevant for GVC participation.

The relational nature of GVCs also considerably reinforces the role of institutional quality as a significant determinant of GVC participation. Having said this, institutional quality and relational GVCs interact in subtle ways. On the one hand, the emphasis this approach places on contractual insecurity naturally implies that production processes involving high degrees of customization (i.e., more relationship-specific investments), and for which a thick “secondary”market is missing, are likely to be located in countries with strong institutional quality (Levchenko, 2007, Nunn, 2007). The reason for this is that in those countries, lead firms are in a better position to discipline the behavior of producers and avoid costly production delays or quality debasements. Nevertheless, and as argued above, the same forces that make relational GVC rely intensively on institutional quality also make GVC links particularly “sticky”, which fosters the emergence of reputational mechanisms of cooperation which might partly substitute for the absence of formal contracting. In addition, under some circumstances, vertical integration may serve as a direct (albeit imperfect) substitute for strong contract enforcement in countries hosting GVCs. Because relational GVCs feature significant flows of credit and intellectual property, a country’s financial institutions and IPR protection policies also constitute important determinants of GVC participation.

The effects of trade costs on GVC participation need also be qualified when GVCs are rela22