Total Factor Productivity Growth at the Firm-Level: The Effects of Capital Account Liberalization

Abstract

This paper is the first to provide firm-level evidence of the effect of capital account liberalization on firms’ total factor productivity (TFP) growth. We find that a one standard deviation increase in capital account liberalization is significantly associated with 0.16 to 0.17 standard deviations increase of the firms’ total factor productivity growth rates. The productivity-enhancing effects are stronger for sectors with higher external financial dependence and capital-skill complementarity and are persistent in the six-year post-liberalization window. Moreover, we show that the transmission mechanisms could be improved financing conditions, technology upgrades, and more use of skilled labor. The direction and asset category of capital account liberalization matter. Additionally, heterogeneous effects exist across firms and countries based on their foreign bank relationship, size, tradability, institutional quality, and economic development.