Effect of Supply Chain Finance on Supply Chain Trade

ABSTRACT Global value chains are increasingly exposed to geopolitical tensions, policy uncertainty, and institutional weaknesses, making supply‐chain trade more fragile. Existing studies largely view supply chain finance (SCF) as a tool for easing liquidity constraints, while its role under political and institutional risk remains underexplored. This study examines how SCF‐proxied by factoring activity in source countries‐affects participation in supply‐chain trade, measured by domestic value added embodied in gross exports. Using a gravity framework combined with a Rajan–Zingales identification strategy and a dataset of about 1.76 million country‐pair–industry observations across 75 countries from 1995 to 2020, we find that SCF significantly promotes supply‐chain trade, especially in industries with higher technological dependence on external liquidity. Crucially, the effect is stronger when destination countries face greater political risk, investment risk, or economic uncertainty. This pattern suggests that factoring not only eases cash‐flow constraints but also enables exporters to transfer payment and country risk to financial intermediaries. Even during systemic financial crises, SCF plays a stabilizing role. Overall, the findings highlight SCF as a key mechanism for enhancing resilience in global value chains, rather than merely a source of working capital.