Uneven effects of financial liberalization on productivity growth in the EU: Evidence from a dynamic panel investigation

This paper investigates the impact of the financial integration process on economic growth. Specifically, in analysing such growth effects, the distinction is made between two growth channels—investment and productivity. Crucially, the analysis tests whether the effects of financial openness on services differ from its effects on manufacturing. Based on a panel of sector-level data (manufacturing and services) from the EU KLEMS database (1980–2009), such effects are estimated in a dynamic panel setting. The main findings suggest that the productivity effects of financial integration, although positive overall, are uneven and they differ between the manufacturing and service sectors. More precisely, the results confirm that the manufacturing sector could profit from the process of global financial integration to a greater extent than services. But the impact of financial globalization on service sectors productivity remains overall positive. On the contrary, capital accumulation was broadly unaffected. Such results remain robust to different sensitivity checks regarding, most importantly, the measurement of financial integration. The findings of the lower productivity impact in services can be understood considering their more intensive skill-biased direction of technological change. At the same time, the strong capital-skills complementarity in services sustained the generation of positive expectations over future productivity growth and attracted financial resources from abroad. As an implication of this research and given the increasing importance of service sectors to modern economic systems, the focus should be placed on searching for more precise channels of long-lasting growth in services. (JEL: F02, F21, F36, F4)