Iwasaki Erina

Developing industrial linkages as spatial binding forces has become crucial for improving firms’ productivity. This paper examines the impacts of the adoption of forward and financial linkages on the vertical integration and performance of textile and garment firms in Egypt. This study uses a sample of 1020 micro-, small-, and medium-sized enterprises, employing propensity score matching to mitigate the endogeneity bias caused by the self-selection problem in adopting industrial linkages. Inverse-probability-weighted regression adjustment is applied as a doubly robust estimator to quantify the impact. The results confirm the positive impact of forward linkage on total factor productivity (TFP). We also found that financial linkage positively affects labor productivity, TFP, and vertical integration, while its impact on exports was marginal. Adopting financial linkage can increase the value-added per labor by 11–13 thousand Egyptian pounds and increase vertical integration by 13 percentage points. Industrial linkages have not realized an impact on exports in the current market structure; however, extending financial linkage works as an alternative to mitigating financial constraints. We underscore the significance of the policy that fosters forward and financial linkages to induce vertical integration and productivity growth.