Abstract
This study attempts to document the impact of on trade between selected Asian economies and rest of the Asian region. Financial development is used to represent financial development level which includes four dimensions from two perspectives; institutional and market. An financial development index is calculated by combining institutional and market level financial development indices. Effect of market and institutional dimension is measured separately on trade of Asian economies with rest of the Asia. Different macro-variables are controlled including GDP per capita, total population, Inward FDI flow, Outward FDI flow and real effective exchange rates for modeling. Sample includes data for twenty years ranging from 1997-2016 for 16 large economies of Asia. Panel data modeling technique effects regression is used with two different proxies of dependent variable. Overall financial is found to have positive and significant relationship with trade. Study confirms the robustness of the results to different measures of trade. Results from fixed effects model confirm positive and significant relationship between all components of financial development and trade, and between overall financial development and trade in Asian economies. Singapore, Japan and South Korea represent highest levels of financial development while other countries showed relatively less development financial development level according to measure used in this study. An important policy implication is if a country wants to grow economically by using instrument of trade policy especially exports improvement, then it has to develop its financial system to efficiently fulfill international trade finance needs. Keywords: Financial Development Index, International Trade, Asia DOI : 10.7176/EJBM/11-11-04 Publication date : April 30 th 2019
Highlights
Asia is becoming increasingly important as its share in the world trade and GDP is on the rise as compared to other regions according to recent report on "Asian economic integration" (AEIR 2018) of Asian Development Bank (ADB)
In a region like Asia which is highly dependent on trade for growth and where financial development levels are not as high as in Western economies, it is interesting to know how financial development affects international trade
Inclusion of financial development index presents the level of financial development of a country in a better and more complete way which was missing in literature in such type of studies
Summary
Asia is becoming increasingly important as its share in the world trade and GDP is on the rise as compared to other regions according to recent report on "Asian economic integration" (AEIR 2018) of Asian Development Bank (ADB). It is important to know all the factors affecting international trade in Asia, in such a scenario to further policies which facilitate trade growth and openness. One of such factors is "Financial development" which facilitates international trade in many ways. Well developed banking system makes it easy to obtain bank loans and well developed stock/bond markets facilitate innovative corporations to secure funds from public and investors directly by issuing shares and bonds (Arestis, Demetriades, & Luintel, 2001; Levine, 1999). In a region like Asia which is highly dependent on trade for growth and where financial development levels are not as high as in Western economies, it is interesting to know how financial development affects international trade
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