Financial Openness Research Articles

FDI inflow and financial channels: international evidence before and after crises

PurposeExtending on the resource-seeking foreign direct investment (FDI) hypothesis, this paper aims to uncover the potential relationship between financial and non-financial channels and inward FDI before and after the global financial crisis.Design/methodology/approachThe sample includes 561 year-country observations on 33 developed and developing countries during 2001 and 2017. This study investigates several determinants such as inflation, gross domestic product growth, exchange rate, trade openness, financial openness, Sharpe ratio and country market capitalization, using ordinary least squares, fixed effects and system generalized method of moments.FindingsThe results indicate a negative relationship between inflation and financial openness with FDI inflow while market capitalization and exchange rate were positively connected to FDI inflow. All three financial channels of FDI inflow: financial market size, financial openness and Sharpe ratio significantly influenced FDI inflow. Moreover, inflation, financial openness and Sharpe ratio imply a meaningful impact on the FDI inflow of developed and developing countries, with a relatively stronger influence during the post-crisis periods. Asymmetric impact tests also revealed similar results.Research limitations/implicationsThese findings offer an impression that financial market development channels may significantly boost FDIs in developing and, as well as developed countries. With special reference to the developing countries, a disciplined financial market and financial openness may help attract more FDIs.Originality/valueImpact of the financial crisis on FDI inflows while observing the impact of the financing channels in developing and developed countries is rare in the academic domain. This study forwards that a structured and open financial market may help in recovering from the financial crisis.

Re-examining the impact of financial intermediation on economic growth: evidence from Turkey

PurposeThis study seeks to investigate the impact of financial intermediation on economic growth in Turkey using annual data spanning 1970–2017.Design/methodology/approachBased on the results of the augmented Dickey–Fuller and Phillips–Perron unit root tests for stationarity, the authors employ the Autoregressive Distributed Lag (ARDL) bounds testing to cointegration to establish the long-run impact of financial intermediation alongside other control factors on economic growth. The study also examines the short-run relationship between financial intermediation and economic growth by estimating the Error Correction Model (ECM).FindingsThe authors’ findings indicate that financial intermediation significantly influences economic growth in both short and long run. However, the effect is positive only in the short run, lending support to the supply-leading hypothesis. Regarding the control variables, the authors observe that while financial openness shows a positive significant impact on economic growth in the long run, gross fixed capital formation matters only in the short run. The results further infer that regardless of the time period, inflation impedes economic growth.Originality/valueIn the empirical analysis of the relationship between financial intermediation and economic growth, financial intermediation is always measured using a single variable. The authors argue that such studies could produce bias and misleading results given that a single proxy does not adequately reflect financial intermediation activities. Likewise, such findings may delude policy implementation. To provide a more vivid and robust analysis, the authors employ the Principal Component Analysis (PCA) to construct a composite index for financial intermediation based on three broad measures. The researchers’ are unaware of any study on the financial intermediation–economic growth nexus using a composite index of financial intermediation. Thus, this paper fills this lacuna in the literature.

An Assessment of the Openness and Transparency of Local Budgets in Belarus

International experience shows that public participation in the budgetary process and openness in the public sector are necessary conditions for a proper economic strategy of the state. Financial openness, in the broadest sense, today represents an important feature of proper fiscal and monetary policy. In a narrow sense, it is more often associated with the openness of the budget process, especially at the local level. Financial openness contributes to the efficient collection and distribution of public resources. It increases the responsibility of governments, strengthens the trust of citizens, and eliminates opportunities for corruption. This paper attempts to develop and test a compact methodology for the operational analysis of online information openness and transparency of the budgetary process at the local level. The developed methodology involves the use of two criteria: (1) the level of transparency of local budget, and (2) an assessment of the efforts by authority in ensuring the transparency of local budgets. The basis of the methodology is expert assessments of the informational significance of particular parts of websites of local authorities in issues of local finance and budgeting. Based on expert assessments of the significance and actual availability of these information elements, we evaluate an integrated assessment of the information content of local authoritiy sites in 2020. We interpret the resulting assessment of the information content of the site with the local budget and finances data as the online openness and transparency of local budgets (Online Local Budget Index of Transparency, OLBIT). Besides, we evaluate what factors (financial, geographical and demographic) affect the transparency level measured by the OLBIT.

Global or Country Business Cycles: Developed versus Developing Countries

Using a multi-level factor model, we estimate a global factor and country factors using the real macroeconomic variables of 71 countries from 1970 to 2018. The global factor successfully captures economic fluctuations in the world economy and primarily comoves with the business cycles of developed countries. Over time, the importance of the global factor in developed countries’ business cycles has risen, while the share of economic fluctuations accounted for by the global factor has changed little and remains low among developing countries. Financial openness appears to be particularly important in promoting the global synchronization of business cycles after 1990.

Governance of Non-state Shareholders and Financial Stability of State-owned Capital: An Analysis on Stock Price Crash Risk

How to better utilize market mechanisms to ensure the stability of Chinese financial system and prevent financial risks under the new development pattern of Chinese expanding financial opening to the outside world has become an extremely important research topic at the national governance level. In the context of the mixed ownership reform, non-state shareholders can better participate in the governance of state-owned enterprises and alleviate the principal-agent problem, thereby reducing the risk of state-owned enterprise stock price crash risk and maintaining the financial stability of state-owned capital.On this foundation, our paper uses the data of state-owned listed companies from 2008 to 2015 as a sample, and manually sorts out the data on the nature of the top ten shareholders, shareholding ratios, and directors appointed by shareholders in the annual report, so as to study the impact of the governance of non-state shareholders on stock price crash risk among state-owned enterprises from the dimensions of equity balance and high-level governance. It finds that it is difficult for non-state shareholders to play a governance role only by holding equity. And only when non-state shareholders appoint directors to participate in the high-level governance of state-owned enterprises, can they effectively alleviate agency problems and improve information transparency, thereby reducing the stock price crash risk of state-owned enterprises. Further research shows that the aforementioned effect is more prominent in state-owned enterprises with low internal management power and competitive industries.Our paper mainly has the following two policy recommendations. On the one hand, it supports the policy spillover effect of state-owned enterprise mixed ownership reform in maintaining the security and stability of Chinese financial market. That is, non-state shareholders appointing directors to state-owned enterprises can reduce the stock price crash risk of state-owned enterprises and maintain the stability of their market value without losing the controlling rights of state-owned shareholders or causing the loss of state-owned assets. Thus, the national leader can pay more attention to the supporting guarantee system for non-state shareholders to appoint directors to state-owned enterprises in the future mixed ownership reform.On the other hand, this paper finds a path for how to effectively prevent and resolve financial risks. Under the realistic environment where the stock market is an important part of Chinese financial system and state-owned listed companies are the mainstay of Chinese stock market, it is possible to effectively ensure that non-state shareholders who are more concerned about the stock price of state-owned enterprises nominate and appoint directors to state-owned listed companies. This will not only help to alleviate the stock price crash risk of state-owned enterprises and maintain the stability of the market value of state-owned listed companies, but also help to maintain the stability and security of Chinese stock market and even the entire financial system.

Impact of Globalization on Major Macroeconomic Variables: Empirical Evidence from Pakistan

Globalization is a multi-dimensional phenomena with profound impact on different aspects of the modern world, including economic, social, political, cultural, environmental, and geographical. This study is an attempt to analyze how various components of globalization, i.e., trade openness, financial liberalization and labor mobility impacts the economic dynamics of a developing country affecting the performance of macroeconomic variables including the budget deficit, inflation and economic growth. In this study, we use the terms trade openness and liberalization along with financial openness, financial liberalization and financial development interchangeably. The purpose is to capture the overall impact irrespective of nature as nature may lead to contradictory results. Furthermore, the labour flows give due attention as human capital is an inevitable avenue for the effective and sustainable growth of any country. It is noticed that various global factors effect budget deficits, inflation and economic growth with varying intensities depending upon the size and dynamics of the economy. The empirical analysis involves the time series data of Pakistan from 1973 to 2014. The autoregressive distributed lag (ARDL) methodology is used to obtain the results and policy related suggestions.

Discovering the relationship between natural resources, energy consumption, gross capital formation with economic growth: Can lower financial openness change the curse into blessing

The objective of this study is to discover the relationship between natural resources, gross capital formation, energy consumption and economic growth. In addition, the study also emphasizes on exploring whether financial openness can change the resource curse into a blessing. Using quarterly data from 1990Q1 to 2018Q4, the study used structural equation modeling technique for the empirical analysis. The conclusions of study indicated the negative relationship of natural resources with economic growth which confirms the existence of resource curse hypothesis. Although, renewable and non-renewable energy positively stimulate Pakistan's economic growth, but, the role of non-renewable energy toward economic growth is more strong compared with renewable energy. Financial openness also stimulates economic growth positively. However, the results for the influence of gross capital formation on economic growth were insignificant. The comprehensive assessment of the empirical examination of the role of financial openness in changing the resource curse into blessing indicated that financial openness doesn't have capability to change the resource curse into a blessing. The in depth analysis put-forward key guide lines for policy formation to efficiently utilize the natural resources in the country.

Financial openness and capital inflows to emerging markets: In search of robust evidence

We reassess the connection between capital account openness and capital flows in an empirical framework that is grounded in theory and makes use of previously unexplored variation in the data. We demonstrate how our theory-consistent regressions can overcome some ubiquitous measurement problems in the literature. Within our proposed framework, we ask: what can be said robustly about the effect of capital account restrictions on capital flows? Our results warrant against over-interpreting the existing cross-country evidence as we find very few robust relationships between capital account restrictiveness and various types of capital inflows. Countries with a higher degree of financial openness are more susceptible to some, but by no means all, push and pull factors. Overall, the results show that policymakers should carefully weigh the ability to shield the domestic economy from some sources of capital flow volatility against the potentially negative long run growth effects.

Impacts of financial openness on economic complexity: Cross‐country evidence

AbstractFew studies are found to examine the relationship between financial openness and economic complexity. Using a panel data of 120 economies during 1996–2016, this paper aims to examine the impact of financial openness, human capital, institutional quality, banking industry concentration, and other factors on economic complexity. We establish dynamic panel models that incorporate lagged‐dependent variables and employ the Generalized Method of Moments (GMM) for estimation. Our pooled‐sample regression results show that the enhancement of overall financial openness could increase the economic complexity significantly, as well as de‐facto and de‐jure openness. The subsample regressions indicate heterogeneous impacts of financial openness depending on country groups and industry. Besides, there exists significant path dependence for ECI improvement, which is more prominent in high‐income countries. For low‐ and middle‐income countries, greater GVC participation and lower banking concentration can promote ECI improvement significantly.

Financial Openness and Financial Development: Evidence from Emerging Countries

We investigate the potential relation between financial openness and financial development for 27 emerging countries for the period between 1996 and 2016. We focus on three dimensions of financial openness: capital account openness, trade openness, and stock-market openness. In this study, we propose alternative measures for capital account and trade openness. Moreover, we offer capital flow and valuation-based measures for stock-market openness as a potential determinant of financial development. Our findings indicate that capital account openness and trade openness are the key drivers of financial development. These results are not sensitive to the use of alternative financial openness and financial development measures, and are robust after being controlled for institutional quality and its components. Our results have implications for policymakers in emerging countries who try to increase the depth of their financial markets for an easier and cheaper access to funds.

The Global Economy after Covid-19: Challenges and Policy Resolutions

The COVID-19 pandemic disrupted the world economy in 2020. As of December 23, 2020 the World Health Organization (WHO) reports more than 76 million confirmed cases of COVID-19 and over 1.7 million deaths worldwide. At the intersection of the COVID-19 pandemic and the global economy, numerous issues pose challenges to scholars and policy makers. Financial globalization may help to slow down the de-globalization of trade after COVID-19. As international financial transactions can be easily implemented, international trade transactions would be facilitated. In addition, financial openness may motivate international trade.This special issue of the EAER features seven papers in both international trade and international macroeconomics and finance on the theme of “The Global Economy after COVID-19: Challenges and Policy Resolutions.”

The impact of trade and financial openness on bank loan pricing: Evidence from emerging economies

In this paper, we examine the impact of trade and financial openness on bank loan pricing. Using data from 35 emerging economies, we first document that higher trade and financial openness lower interest rates on gross bank loans using country-specific measures for trade and financial openness. We then confirm our findings using firm-specific measures for trade and financial openness and individual loan spread. Exploiting the accession to World Trade Organization (WTO) as a quasi-natural experiment, we observe loan interest rates declined in countries after joining the WTO. Overall, we imply that openness is beneficial for financial development in emerging economies.

Financial Openness and Economic Growth in Côte d’Ivoire: The Total Factor Productivity Channel

This study analyses the influence of financial openness on total factor productivity (TFP) in Cote d’Ivoire to examine one of the channels through which financial openness affects economic growth. To this end, the study uses data from the Penn World Table (PWT) 9.1 and the World Bank over the 1984-2018 periods. By using Dynamic Ordinary Least Squares (DOLS) and Fully Modified Ordinary Least Squares (FMOLS) methods, the paper shows that financial openness positively affects total factor productivity in Côte d’Ivoire. Therefore, total factor productivity is one of the channels through which financial openness affects economic growth. This result calls for a series of measures to strengthen the competitiveness of the country to attract a large inflow of foreign capital and to boost the level of the TFP which is an engine of economic growth. Moreover, the results reveal that financial development, macroeconomic stability (as measured by the inflation rate) and domestic investment are important determinants of total factor productivity growth.

Financial Integration in Asia: A Macroeconomic Perspective

This study examines the effect of financial integration on growth, total factor productivity, and capital accumulation using a dynamic panel system‐GMM for a dataset consisting of 43 Asian economies from 1995 to 2015. The impact of de jure financial openness on output, productivity, and capital stock growth is significant, while the effect of de facto financial integration is fuzzy. The disaggregate asset classes (namely, inflows of foreign direct investment and debt) are found to facilitate higher output while derivative inflows yield an undesirable effect. For developing countries, financial openness significantly boosts productivity and capital accumulation while for less developed countries it only enhances productivity. The negative impact of the currency crisis on growth and capital accumulation is found to be significant for more open economies. The currency crisis is more prominent for developed economies, partially effective for less developed countries, and partially ineffective for developing economies in Asia.

Financial Development, Financial Openness and Economic Growth in Nigeria

This study examined the impact of financial development and financial openness on economic growth in Nigeria between 1981 and 2019. This was done through the use of the Auto-Regressive Distributed Lag (ARDL) model. In doing this, the ratio of credit to the private sector to the GDP and broad money to narrow money were used as measures of financial development and financial openness respectively. The study found that financial development has a positive and insignificant impact on economic growth in Nigeria in the long and short-run. The study also found that financial openness has a negative and insignificant impact on economic growth in Nigeria in the long-run. The results of the study further revealed that simultaneous existence of financial development and financial openness has an insignificant but positive impact on economic growth in Nigeria in the long-run. Based on the findings, the study recommended that the CBN should increase its efforts towards the regulation and supervision of the financial sector to reduce the incidence of financial distress. The study also recommended that efforts to develop the mortgage and insurance sector and the capital market should be intensified through regulatory improvements, improvements in the instruments in use in the market as well as public enlightenment programs to increase awareness of the potentials of the mortgage, insurance and capital markets. The final recommendation made by the study is that more restrictions should be placed on the inflow of capital in and out of the country to guard against sudden capital flow reversals.

The China-U.S. Equity Valuation Gap

Before 2009, the market average price earnings ratio of Chinese firms is significantly higher than that of the U.S. firms, while after 2009, the valuation gap reverses. Using data from 1995 to 2018, we examine the dynamics and sources of valuation differentials between comparable Chinese and U.S. firms. The sectoral composition of the indices plays a minimal role but growth expectations, financial openness, financial development, and (changes in) the investor base, all contribute substantially to the cross-sector and time-series variation of the valuation differentials. Financial openness and changing growth expectations are the most important contributors.

Financial Openness and Poverty Level: The Empirical Investigation in Nigeria

Financial Openness and Poverty Level: The Empirical Investigation in Nigeria

Openness and Agricultural Performance in Nigeria

The paper examined the effect of openness on agricultural output in Nigeria. Data for the study was sourced from CBN statistical bulletin 2019 and quarterly report 2020 covering the period 2010Q1 to 2020Q2. ADF unit root test, Johansen cointegration and Autoregressive Distributed Lag Methods were employed in the study. The unit root test results revealed that the variables are a mixture of I(1) and I(0) order of integration. Empirical result of the study shows that increase in trade openness will lead to a positive but insignificant increase in agricultural output while increase in financial openness will lead to a significant decrease in agricultural output in the country. The study concluded that trade openness affect agricultural output positively, while financial openness affect agricultural output negatively. The study therefore recommended that efforts should be put in place to ensure that trade openness is encouraged, also, government and relevant stakeholders in agricultural sector should make sure that foreign direct investment to agricultural sector are accountable and properly utilized in the sector.

Online Openness and Transparency of Local Budgets in Belarus

AbstractWorld experience shows that public participation in the budget process and openness in the public sector are the necessary conditions for a proper economic strategy of the State. Financial openness contributes to the efficient collection and distribution of public resources. It expands the responsibility of governments, strengthens the trust of citizens and prevents opportunities for corruption. Researchers around the world (Alt, Lassen, Skilling, Bernick, Gandía, Yannacopoulos, Darbyshire, Slukhai and others) and international organisations such as the International Monetary Fund, OECD, the World Bank, the International Budget Partnership (IBP), the Global Initiative for Financial Transparency and the Open Government Partnership have shown growing interest in financial openness issues in recent years. This paper attempts to develop and test a methodology for the operational analysis of online information openness and transparency of the budget process at the local level. The developed methodology used two criteria: (1) the level of transparency of the local budget and (2) an assessment of authority's efforts in ensuring transparency of local budgets. It is based on expert assessments of the informational significance of particular elements of websites of local authorities in issues of local finance and budget. We interpret the resulting assessment of the information content of the site with the local budget and finances data as the online openness and transparency of local budgets Online Local Budget Index of Transparency (OLBIT).

Impacts of openness on financial development in developing countries: Using a Bayesian model averaging approach

This study investigates the influences of trade and financial openness on financial development over the period 2003–2017 from a sample of 64 developing countries, employing a Bayesian model averag...