Working Paper: NBER ID: w14558
Authors: M. Ayhan Kose; Eswar S. Prasad; Marco E. Terrones
Abstract: Economic theory has identified a number of channels through which openness to international financial flows could raise productivity growth. However, while there is a vast empirical literature analyzing the impact of financial openness on output growth, far less attention has been paid to its effects on productivity growth. We provide a comprehensive analysis of the relationship between financial openness and total factor productivity (TFP) growth using an extensive dataset that includes various measures of productivity and financial openness for a large sample of countries. We find that de jure capital account openness has a robust positive effect on TFP growth. The effect of de facto financial integration on TFP growth is less clear, but this masks an important and novel result. We find strong evidence that FDI and portfolio equity liabilities boost TFP growth while external debt is actually negatively correlated with TFP growth. The negative relationship between external debt liabilities and TFP growth is attenuated in economies with higher levels of financial development and better institutions.
Keywords: Financial Openness; Productivity Growth; Capital Account Liberalization
JEL Codes: F36; F41; F43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| de jure capital account openness (F32) | TFP growth (O49) |
| foreign direct investment (F23) | TFP growth (O49) |
| portfolio equity inflows (F21) | TFP growth (O49) |
| external debt liabilities (F34) | TFP growth (O49) |
| TFP growth (O49) | economies with open capital accounts (F32) |
| better-developed financial markets (G19) | mitigation of negative impact of external debt (F65) |