How demand scale affect services exports? Evidence from financial development perspective

Abstract

China's service trade is increasingly capable of "going out," but there are still problems of uneven and insufficient economic development. This study uses bilateral services trade data from 2000 to 2018 to conduct empirical testing using the extended mutual gravity model and the threshold effect model. The results show that (i) an expansion in the size of the domestic market can significantly boost a country's service exports, and the magnitude of the impact is rising year by year. (ii) The development of the financial sector can strengthen the local market effect by increasing demand, thus promoting foreign exports. Financial development has a positive moderating effect on the relationship between demand size and the exports of service trade. (iii) Under the influence of the level of financial development, there is a "threshold effect" of domestic market demand size on service exports. This threshold effect varies among different types of services and different country categories. This study provides macro evidence that the scale of demand affects service exports and has important theoretical implications for the formulation of national service trade policies.