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The E ffects of Financial Development on Trade Performance and the Role of Institutions

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  • Youssouf KIENDREBEOGO

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Abstract

This paper aims to address the empirical question of whether a country's level of manufacturing trade is affected by its financial sector development and to investigate the role of institutions in this relationship. Countries endowed with better-developed financial systems tend to specialize in industries that rely on external finance in production. This effect is likely to be stronger in countries with high-quality institutions. Using pure cross-sectional and panel specifications on a sample of 75 countries over the period 1971-2010, we find that financial development strongly and robustly exerts a positive effect on manufacturing exports, even after controlling for the effect of banking crises. Furthermore, institutional quality is found to have a favorable effect on the extent to which finance influences manufacturing trade, suggesting a multiplicity of experiences of the largest exporters of manufactured goods.

Suggested Citation

  • Youssouf KIENDREBEOGO, 2012. "The E ffects of Financial Development on Trade Performance and the Role of Institutions," Working Papers 201235, CERDI.
  • Handle: RePEc:cdi:wpaper:1398
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    References listed on IDEAS

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    1. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
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    3. Francois, Joseph & Manchin, Miriam, 2013. "Institutions, Infrastructure, and Trade," World Development, Elsevier, vol. 46(C), pages 165-175.
    4. Kletzer, Kenneth & Bardhan, Pranab, 1987. "Credit markets and patterns of international trade," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 57-70, October.
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    6. Do, Quy-Toan & Levchenko, Andrei A., 2007. "Comparative advantage, demand for external finance, and financial development," Journal of Financial Economics, Elsevier, vol. 86(3), pages 796-834, December.
    7. Huang, Yongfu & Temple, Jonathan, 2005. "Does External Trade Promote Financial Development?," CEPR Discussion Papers 5150, C.E.P.R. Discussion Papers.
    8. Bose, Niloy & Murshid, Antu Panini & Wurm, Martin A., 2012. "The Growth Effects of Property Rights: The Role of Finance," World Development, Elsevier, vol. 40(9), pages 1784-1797.
    9. Fabian Valencia & Luc Laeven, 2012. "Systemic Banking Crises Database; An Update," IMF Working Papers 12/163, International Monetary Fund.
    10. Svaleryd, Helena & Vlachos, Jonas, 2005. "Financial markets, the pattern of industrial specialization and comparative advantage: Evidence from OECD countries," European Economic Review, Elsevier, vol. 49(1), pages 113-144, January.
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    Cited by:

    1. Muhammad Ahad, 2017. "Impact of Financial Development on Trade Balance: An ARDL Cointegration and Causality Approach for Pakistan," Global Business Review, International Management Institute, vol. 18(5), pages 1199-1214, October.
    2. Muzammil, Muhammad, 2015. "Impact of Financial Development on Trade Balance: An ARDL Cointegration and Causality Approach for Pakistan," MPRA Paper 68587, University Library of Munich, Germany.

    More about this item

    Keywords

    Financial Development; Manufacturing Exports; Comparative Advantages; Institutional Quality;

    JEL classification:

    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • F10 - International Economics - - Trade - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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