The effect of societal cultures on financial development and openness levels: A comparison of selected Western and Turkic countries

In this study, we investigate whether financial development enhances economic growth in Turkic countries, namely, Azerbaijan, Kazakhstan, Kyrgyzstan, and Türkiye from 1995 to 2017. The financial development index is obtained from the International Monetary Fund to proxy for the level of financial development. The index shows the level of development of financial institutions and financial markets in terms of depth, access, and efficiency. The annual percentage growth rate of GDP per capita based on constant local currency is taken as an indicator of economic growth. The main result of the analysis shows that there is a positive relationship between financial development and economic growth. The result is robust using random effect regression, adding inflation, and including Banking Z Score. However, the main impact can be seen in the financial institution instead of the financial market proxy. The results support the supply-leading hypothesis for the economies of four Turkic countries.

While the important role of financial development for economic growth, as well as for its effect on economic inequality, has been widely acknowledged by the literature, far less attention has been put on understanding how growth and inequality may be differently influenced by alternative types of financial development. Against this background, we investigate the impact of different types of financial development on the growth–inequality nexus with a panel of 110 advanced and emerging economies and yearly data ranging from 1980 to 2016. Using the panel conditionally homogeneous vector-autoregressive (PCHVAR) model of Georgiadis (2014); Georgiadis (2012), we find that the overall level of financial development (measured by the International Monetary Fund (IMF)’s financial development index) has a significant impact on the growth–inequality nexus. Specifically, our results reveal that a higher level of overall financial development results in more equitable economic growth. Furthermore, an increase in the income share of the top 10% income earners has a significant negative impact on economic growth for low and high levels of overall financial development but is insignificant for middle levels. By looking at more disaggregated subindices of financial development, we find that economic growth increases the income share of the low 10% income earners when financial institutions and markets are deeper and financial markets are more efficient. Thus, our results call for a more differentiated view on the concept of financial development in order to derive policy measures aimed at different parts of the society.

Purpose The purpose of this study is to determine financial development levels that enhance export diversification via innovation. While innovation can diversify exports, the critical threshold at which financial development may enhance the relationship remains ambiguous. This study will use the panel smooth transition regression (PSTR) model to investigate the nonlinear link between innovation and export diversification, with a focus on financial development. The model simplifies the identification of an endogenous threshold that separates nations into financial development regimes and forecasts the impact of innovation on export diversification within these regimes. Design/methodology/approach The paper has used a PSTR model with the transition variable of the level of financial development. Basically, the PSTR model assumes parameters to change smoothly as the function of a threshold variable. First, the hypothesis of the linear model is tested against the non-linear hypothesis. Fischer LM test, Wald test and likelihood ratio are used to test the nonlinearity. This study adheres to the procedures proposed by Fouquau et al. (2008) and Colletaz and Hurlin (2006) to estimate the parameters of the PSTR model and perform the tests mentioned above. Findings The results demonstrate that financial development is a crucial mediator linking innovation to export diversification. At lower levels of financial development, an increase in the innovation index is accompanied by a decrease in export diversification, indicating that in the context of low financial development, innovation fails to translate into export diversification. However, beyond a certain level of financial development, innovation has a positive impact on export diversification, highlighting its critical role in facilitating the expansion of export diversification. Research limitations/implications This study, like any other empirical research, has its limitations. First, it uses a principal component analysis (PCA)-based innovation index to examine how innovation affects export diversification. This study examines the robustness of the results only within the panel generalized method of moments (GMM) framework and does not use an alternative general innovation measure in the PSTR model to further test robustness. Second, while the panel GMM model addresses potential endogeneity and causal inference concerns, these issues remain unresolved in the PSTR framework. Future research could tackle these limitations within the PSTR context. Practical implications It is imperative that pertinent policies must be customized to the specific stage of financial development. In the initial stages, the primary focus should be on promoting financial inclusion and innovation in new export sectors. This can be achieved by encouraging firms to invest in research and development, collaborate with research institutions, or leverage intellectual property rights to improve their competitiveness in global markets. In the later stages, the focus should be on fostering innovation ecosystems, facilitating the internationalization of innovative firms, and ensuring a robust financial system. Social implications According to the research findings, policymakers in countries with lower financial development should adopt policies such as credit guarantees, public innovation funds, institutional support for small and medium-sized enterprises, infrastructure investments, productivity enhancement and attracting foreign direct investment to reduce financial barriers, foster innovation and promote export diversification. In countries with higher financial development, policymakers can promote innovative activities and programs that increase productivity, increase gross domestic product per capita and encourage currency depreciation to improve export diversification while providing export-related tax incentives. Originality/value The paper contributes to the literature on innovation and export performances in four ways: it emphasizes that diversity in exports – volumes, intensities, quantities and markets – is a better indicator of export performance; it challenges the linearity assumption typically made about innovation and exports, pointing to the role of financial development in moderating that association; it endogenously categorizing the various financial development regimes to help address the contradictory findings on innovation impacts; and finally, it introduces an innovation index – the kind that can be developed through PCA and encompass patents, trademarks and R&D data rather than a mere measure of innovation.

The influence pathways of financial development on environmental quality: New evidence from smooth transition regression models

The influence pathways of financial development on environmental quality: New evidence from smooth transition regression models

This study aims to reveal whether financial development and regulatory efficiency have a noteworthy role in developing countries ' relationship between foreign direct investment and export of high-tech products. Rich panel data from 70 developing countries for the period 2002-2015 are used in the analysis to examine the relevant relationship. The Generalized Moments Method (GMM) is utilized in the study, since it allows to control the endogeneity relationship between variables. Findings shows that financial development and regulatory quality level affect the contribution of FDI on exports of high-tech products in developing countries. According to results, in countries where regulatory quality and financial development level are higher, FDI may contributes positively to export of high technology products. However, it couldn't be found any significant relationship for countries which have less regulatory quality and financial development level.

What are the economic, political, institutional, socio-cultural, and geographical determinants of financial development in developing countries? This paper uses the two-way fixed effects (with clustered standard errors) and annual panel data from 1980 to 2018 for 69 developing countries in sub-Saharan Africa, Middle East and North Africa, East and South Asia, Latin America, and the Caribbean to address this question. The principal component analysis is employed to construct a financial development index based on three financial development indicators. This study builds on the previous studies by introducing new potential determinants of financial development such as the perception of corruption, and by exploring important quadratic and interaction effects. The results show that national income, trade openness, indices of political stability and Polity2 (a democracy score), perception of corruption, the predominant religion in the countries, and geographical factors such as territorial access to the sea explain the differences in the levels of financial development across countries and regions. A rise in national income leads to a higher level of financial development and countries with a high perceived level of corruption have a lower level of financial development. There is strong evidence of threshold effects as trade openness has a diminishing marginal effect on financial development while the auxiliary growth regressions show that financial development has an increasing marginal effect on national income. Of the five regions studied, East and South Asia and sub-Saharan Africa have the highest and lowest levels of financial development, respectively. Also, fuel-exporting countries, least developed countries, and landlocked countries tend to have lower levels of financial development. These results have relevant policy implications for developing countries in their continued efforts to achieve better financial development and ultimately, sustainable economic development.

Impact of China’s outward foreign direct investment on environmental pollution in the home country

This study investigates the impacts of financial intermediary and stock market on economic growth for 49 countries over 1960~2004. The results show that stock market exhibits significantly positive effects on economic growth. On the contrary, financial intermediary displays significantly varying effects of economic growth over the level of financial intermediary development. Financial intermediary accelerates economic growth in low level of financial intermediary development, and turns to mitigate economic growth as financial intermediary development getting into high level. Furthermore, this essay finds that stock market does assist in boosting both of productivity growth and capital accumulation, and thus speeding up economic growth for both of developing and industrial countries over 1980~2004. And, it boosts productivity growth primarily by advancing technical progress (frontier shift effect), rather than improving efficiency (catching up effect) in all of sample countries. In contrast, financial intermediary conveys its impacts on economic growth primarily only by productivity growth, rather than by capital accumulation. And, the impacts of financial intermediary on productivity growth mainly by efficiency change effect, rather than by technical change effect.

The impact of financial development on the real estate industry has increased with the degree of financial control. This research presented in this paper divides China’s area into strong and weak regions based on the degree of financial control, and then it studies the relationship between housing price changes and the level of financial development using panel data from the period 1994 to 2018. We find that the level of national sample financial development plays an important role in promoting the housing prices. In areas with strong financial control, financial resources tend to be allocated to the real estate industry, boosting real estate prices. In areas with weak financial control, the role of financial development in promoting real estate prices is not obvious. The funds accumulated by financial institutions are more marketable and independent. We have confirmed these findings by our analysis of the transformation of certain financial control and financial development variables, the application of Panel-VAR estimation methods, and other robustness tests.

The paper investigated the impact of financial development on CO2 emissions in Nigeria from 1981 to 2019. In the process of investigating the impact, Augmented Dickey-Fuller and Philip Perron, as well as the Zivot-Andrew structural breaks, unit root tests were applied. Their results indicated that financial development, level of income, and CO2 emissions were stationary at the first difference and that of Zivot-Andrew structural breaks indicated a mixture of integration. Cointegration relationship among the variables was established through autoregressive distributed lag model bounds test. The autoregressive distributed lag model long-and-short run models results indicated that financial development and income level significantly negatively impact the CO2 emissions. The suggestion based on these results is that financial development and income level help in financing clean projects in the long-and-short runs. The Granger causality result revealed bidirectional causality from financial development to CO2 emissions, income level to CO2 emissions, and financial development to income level. The variance decomposition analysis indicates that financial development and income level have contributed less to CO2 emissions, and impulse response function results revealed that CO2 emissions respond negatively to shocks in financial development and income level. Therefore, we recommend expanding the Nigerian financial market in financing clean projects for a clean environment alongside checking income generation activities that bring about emissions of CO2, such as burning trees for charcoal production in the forest, among others.Keywords: Financial market development, CO2 emissions, ARDL approachJEL Classification: G20, Q53, C32

This study examines the relationship between financial development and economic growth. Thus, this study aims to find empirical shreds of evidence for the direction of the causality between financial development proxied by domestic credit to the private sector and per capita GDP growth by using the panel granger causality test of the Dumitrescu-Hurlin Test. For this purpose, we used a panel of 16 OECD countries from 2008 to 2019 to provide evidence of whether the supply leading hypothesis or demand following hypothesis or both holds. All econometric exercises are carried out for whole countries and high-income countries, and upper-middle-income country groups in the sample. Due to cross-sectional dependence among the sample countries, we determine the degree of integration of each variable by employing the second-generation panel unit root tests of CIPS. We continue our analysis with the panel causality test developed by Dumitrescu and Hurlin (2012) to determine the direction of the causality between variables. For this purpose, we performed three sets of causality analyses. In the first one, we include all countries in the panel. We then divided the countries into two sub-groups based on the income classification and the level of financial development in these countries proxied by domestic credit to the private sector. The causality test results, including all countries in the sample, indicate that the hypothesis holds the supply leading hypothesis during the sample period. This means that even though this panel contains countries with a development level, financial development still seems to be a pre-condition for economic growth for these nations. We also obtain the same results when we include high-income countries in the sample. The study results provide compelling evidence for the relationship between economic growth and financial development since the sample includes countries with different levels of financial development with different degrees of per capita GDP growth.

Purpose ― This paper aims to empirically investigate the impact of currency swaps on international trade, given China's differential level of financial development and its currency swap partners. Methods ― The study employes an empirical structural gravity model using datasets encompassing financial development, trade, and intuitive gravity equation variables for 27 countries from 1980 to 2013. The level of financial development and swaps was captured by the interaction term of the disaggregated measure of financial development, such as access, depth, and efficiency, each interacting with currency swaps.Findings ― The findings suggest that currency swaps are essential for trade and exhibit a large trade effect, especially for countries with relatively low levels of financial development. The paper substantiates empirical evidence indicating disparities in financial development across countries, and such differences are important in determining trade patterns. Implication ― Strong financial systems promote trade in advanced economies, whereas the opposite holds true for developing countries. The examination of the influence of financial systems on trade through empirical tests remains important on the research agenda of policymakers and researchers, especially those looking at industry-level import and export data.Originality ― The study delves into the nexus between financial development and trade within the framework of the Central Bank bilateral currency swap network by highlighting the role of financial institutions and market size (depth), activity (access), and efficiency. In addition, it addresses the drawbacks of previous empirical research that largely focuses on the private credit-to-GDP ratio as a key proxy for financial development.

Financial development is recognized as an absorptive capacity in the relationship between foreign direct investment (FDI) and economic growth. Therefore, FDI effect on economic growth is contingent with the level of financial development. However, existing studies also show that financial development dampens economic growth through the “too much finance harms economic growth” hypothesis. Hence, there is a question of how far financial development should be developed to optimize the benefits of FDI on economic growth. The novelty of this study is that it reexamines the role of financial development in FDI-growth relationship by including the interaction term between FDI and the nonlinearity of financial development on economic growth in the period following the 2007–2008 Global Financial Crisis. Interestingly, our results demonstrate that the nonlinear relationship of financial development on economic growth is a U-shaped curve by using data from the 2009–2013 period, for 65 developing countries, which contrast the findings from previous studies. The absorptive capacity effects work nonlinearly, in that FDI accelerates growth after reaching a certain level of financial development, and that the positive effect originates from a minimum level. The study thus suggests that the level of financial development needs to be increased since it serves as a form of absorptive capacity enabling the positive growth effects of FDI in the recipient countries.

Orientation: The financial system performs essential role in the mechanisms through which economic activities translate into economic growth and development of African economies, especially through their role in the allocation of finance from the surplus units to productive activities. Research purpose: This article examines how monetary policy instruments impact the level of financial development in 37 African countries over the period 2002–2015. The article analyses how the governance systems in these countries can have both first- and second-order effects on the level of financial development through monetary policy mechanisms. Motivation for the study: The need for the study emanates from the move toward monetary integration enshrined in the charter which culminated in the formation of the African Union. Inadequate discussion on the topic within the African continent also engineered interests in this investigation. Research approach/design and method: To deal with any endogeneity issues, we perform the estimations using the dynamic general method of moment model. Main findings: The results show that monetary policy instruments in Africa promote higher level of financial development. Also, financial development is stronger in the wake of weak governance systems. However, the interplay between effective governance and effective monetary policy has stronger positive impact on the level of financial development in Africa. Practical/managerial implications: The study calls for the institution of responsive monetary policies that harness strong institutions to promote financial development. Contribution/value-add: The article highlights the contributions of strong institutions that stimulate the contribution of monetary policy in effective financial intermediation.