Abstract
There is a long debate among policymakers and academicians regarding whether assessments of international financial integration have significant growth benefits and whether such benefits compensate for the accompanied risks. Recent financial crisis has revived this debate. The previous empirical studies have not been able to establish conclusive presumed benefits of financial integration for economic growth. This paper attempts to analyze the financial openness and total factor productivity (TFP) growth nexususing dynamic panel regression models for a substantial sample of countries ranging from year 1970 to 2014. Different measures of financial openness are incorporated in the dataset. We find evidence that financial integration is associated with higher TFP growth. A range of integration measures (both de jure and de facto) shows robust association with financial integration and TFP growth. The result also suggests that financial development might reduce the marginal effects of financial integration on TFP growth. This finding, however, appears to be influenced by the recent global economic turmoil and excessive private finance, especially in recent years.
Highlights
Cross-country financial flows are fundamental to international economics
Current empirical studies have not reached any consensus regarding the impact of international financial integration on growth, which calls for the development of more sophisticated empirical research
Different literature on growth suggests that if financial globalization affects the growth of nations, it is more likely to do so through its impact on total factor productivity (TFP), rather than factor accumulation
Summary
Cross-country financial flows are fundamental to international economics. There are hot debates among policymakers and academicians on the pros and cons of the current cross-border financial integration. In the baseline regression analysis, different capital control/openness indices (e.g., Di and Ka) as de jure measures of integration and stock of foreign direct investment (FDI) relative to GDP as de-facto financial integration are considered. Theoretical and empirical literature (Borensztein et al 1998; Edwards 2001; Arteta et al 2003; Durham 2004; Woo 2009; Alfaro et al 2009; Baltabaev 2014, etc.) recently suggested that the absorptive capacity of a host country plays important roles in realizing the benefits of financial integration. The empirical results show that economies with better-developed financial markets do not necessarily benefit more from FDI in accelerating their economic growth, which is contrary to Alfaro et al (2009) They find that countries with well-developed financial markets gain significantly from FDI via TFP improvements. This paper concludes with a brief summary of the findings and their implications in Sect. 6 “Conclusion”
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