Domestic Environmental Demand and Global Value Chains

Abstract This study examined how domestic environmental demand can influence countries' participation in global value chains (GVCs) in the environmental sector, including waste management, pollution control, and environmental protection services. Using a crosscountry dataset, a measure of environmental demand was constructed based on population exposure to PM 2.5 concentrations exceeding 10 μg/m 3 . The results show that a 1 percent increase in relative domestic environmental demand increased GVC participation, raising relative production length by 0.125 percent in forward‐linked GVCs and by 0.175 percent in backward‐linked GVCs. Two mechanisms were identified: an intermediate climbing effect, through which higher domestic demand promoted upstream integration, and an induced innovation effect, through which larger market scale stimulated technological advancement. These findings indicate that countries with substantial environmental pressures and large domestic markets can leverage domestic environmental demand to enhance their positions in global environmental value chains and support green development.