Unlocking inclusive growth: The nexus of digitalization, formalization, and global value chains

This study explores the nexus of digitalization, formalization, and global value chain (GVC) participation, providing critical insights into inclusive growth. Despite the importance of the nexus, common notions regarding the positive effects of digitalization on enterprise formalization and GVC participation have been inferred without sufficient empirical support, while few studies have examined the reciprocal impact of formalization on GVC participation. Utilizing probit and tobit estimations with cross-sectional firm-level data from the World Bank's Enterprise Surveys spanning 28 Asia and the Pacific countries and approximately 20,000 small and medium-sized enterprises (2008-2018), the findings reveal that enterprises adopting digital connectivity, such as email or website technologies, are more likely to operate formally. Formalization not only facilitates GVC participation but also deepens such engagement. This underscores the pivotal role of digitalization and formalization in enabling meaningful GVC involvement. Based on the estimated results, the policy priority should be policy measures enhancing informal enterprises' fundamental digitalization as they are cost-effective and can concurrently promote the formalization of enterprises and their GVC participation. In addition, policy measures that foster labor productivity and formalization can be implemented as supporting policies.