Does Financial Development Enhance Foreign Trade in Selected Transitional Economies?

• Authors: Kunofiwa Tsaurai , Patience Hlupo

Title variants

Czy rozwój finansowy wpływa na rozwój handlu zagranicznego w wybranych gospodarkach przejściowych?

• Languages of publication: EN

Abstracts

EN

The study investigates the influence of financial development on foreign trade in transitional economies using panel data (1994–2014). Although empirical studies on the impact of financial development on foreign trade are available, none of them that the authors are aware of attempted to explore the subject matter in the context of transitional economies. None attempted to investigate if human capital development is a channel through which financial development influences foreign trade or international trade. Under fixed effects, financial development was found to have a non‑significant positive influence on foreign trade, while the random effects approach shows a significant positive relationship running from financial development towards foreign trade. The findings resonate with the majority of the literature on the subject. However, pooled ordinary least squares (OLS) shows that financial development had a significant negative influence on foreign trade. Under both fixed and random effects, human capital development was found to be a channel through which financial development had a significant positive effect on foreign trade. The results are in line with Patrick’s (1966) argument that foreign trade is quickened by high levels of human capital and financial development. The implication of the study is that transitional authorities should develop and implement human capital development enhancement policies in order to enable financial development to have a significant positive effect on foreign trade. In contrast to the available literature, human capital development was found to have had a significant negative impact on foreign trade under the OLS approach. Future studies on the subject matter should address the endogeneity concerns and the dynamic characteristics of the foreign trade data.

PL

W opracowaniu zbadano wpływ rozwoju finansowego na handel zagraniczny w gospodarkach przejściowych z wykorzystaniem danych panelowych (dla lat 1994–2014). Chociaż dostępne są badania empiryczne dotyczące wpływu rozwoju finansowego na handel zagraniczny, żadne ze znanych autorom badań nie stanowiło próby zgłębienia tematu w odniesieniu do gospodarek przejściowych. Nie podjęto próby zbadania, czy rozwój kapitału ludzkiego jest kanałem, poprzez który rozwój finansowy wpływa na handel zagraniczny lub handel międzynarodowy. W przypadku podejścia opartego o efekty stałe stwierdzono, że rozwój finansowy nie ma istotnego pozytywnego wpływu na handel zagraniczny, podczas gdy podejście oparte o efekty losowe wskazuje na istotną pozytywną zależność między rozwojem finansowym a handlem zagranicznym. Ustalenia te są zbieżne z większością literatury przedmiotu. Jednakże, metoda pooled OLS wskazuje, że rozwój finansowy miał znaczący negatywny wpływ na handel zagraniczny. Zarówno w przypadku podejścia opartego o efekty stałe, jak i losowe, rozwój kapitału ludzkiego okazał się kanałem, przez który rozwój finansowy miał istotny pozytywny wpływ na handel zagraniczny. Wyniki ten są zgodne z argumentacją Patricka (1966), że handel zagraniczny jest napędzany przez wysoki poziom kapitału ludzkiego i rozwoju finansowego. Z badania wynika, że władze państw przejściowych powinny opracować i wdrożyć politykę rozwoju kapitału ludzkiego, tak aby rozwój finansowy miał znaczący pozytywny wpływ na handel zagraniczny. W przeciwieństwie do dostępnej literatury, niniejsze badanie wykazało, że rozwój kapitału ludzkiego miał znaczący negatywny wpływ na handel zagraniczny przy zastosowaniu podejścia OLS. Przyszłe badania na ten temat powinny uwzględniać kwestie związane z endogennością i dynamicznym charakterem danych dotyczących handlu zagranicznego.

Keywords

EN

Financial Development; Foreign trade; Transitional Economies; Panel Data

PL

rozwój finansowy; handel zagraniczny; gospodarki przejściowe; dane panelowe; rozwój finansowy; handel zagraniczny; gospodarki przejściowe; dane panelowe

• Publisher: Uniwersytet Łódzki. Wydawnictwo Uniwersytetu Łódzkiego
• Journal: Comparative Economic Research. Central and Eastern Europe
• Year: 2020
• Volume: 23
• Issue: 4
• Pages: 69-86

Dates

published

2020-12-30

Contributors

author

Kunofiwa Tsaurai

• Ph.D., Associate Professor at the University of South Africa, Department of Finance, Risk Management and Banking, Pretoria, South Africa

• https://orcid.org/0000-0001-8041-1181

author

Patience Hlupo

• Lecturer at Bindura University of Technology, Bindura, Zimbabwe

References

• Abubakar, A., Kassim, S.H., Yusoff, M.B. (2015), Financial development, human capital accumulation and economic growth: Empirical evidence from the economic community of West African States (ECOWAS), “Procedia Social and Behavioral Sciences”, 172 (January), pp. 96–103. https://doi.org/10.1016/j.sbspro.2015.01.341
• Akeem, U.O. (2011), Performance evaluation of foreign trade and economic growth in Nigeria, “Research Journal of Finance and Accounting”, 2 (2), pp. 1–15.
• Askenazy, P., Caldera, A., Gaulier, G., Irac, D. (2011), Financial Constraints and Foreign Market Entries or Exits: Firm-Level Evidence from France, Working Papers 328, Banque de France. https://doi.org/10.2139/ssrn.1832647
• Babatunde, M., Fowowe, B. (2010), Foreign trade and Financial Development Link: Evidence from Sub-Saharan Africa, “Journal of Economic Management”, 7 (1), pp. 1–15.
• Baldwin, R., Krugman, P. (1989), Persistent trade effects of large exchange rate shocks, “The Quarterly Journal of Economics”, 104 (4), pp. 635–654. https://doi.org/10.2307/2937860
• Beck, T. (2002), Financial development and foreign trade: Is there a link?, “Journal of International Economics”, 57 (1), pp. 107–131. https://doi.org/10.1016/S0022-1996(01)00131-3
• Becker, B., Chen, D., Greenberg, J. (2013), Financial development, fixed costs and foreign trade, “Review of Corporate Finance Studies”, 2 (1), pp. 1–28. https://doi.org/10.1093/rcfs/cfs005
• Bellone, F., Musso, P., Nesta, L., Schiavo, S. (2010), Financial constraints and firm export behaviour, “The World Economy”, 33 (3), pp. 347–373. https://doi.org/10.1111/j.1467-9701.2010.01259.x
• Benhabib, J., Spiegel, M.M. (1994), The role of human capital in economic development evidence from aggregate cross-country data, “Journal of Monetary Economics”, 34 (2), pp. 143–173. https://doi.org/10.1016/0304-3932(94)90047-7
• Berman, N., Héricourt, J. (2010), Financial factors and the margins of trade: Evidence from cross-country firm-level data, “Journal of Development Economics”, 93 (2), pp. 206–217. https://doi.org/10.1016/j.jdeveco.2009.11.006
• Bordo, M., Rousseau, P. (2012), Historical Evidence on the Finance-Trade-Growth Nexus, “Journal of Banking and Finance”, 36 (4), pp. 1236–1243. https://doi.org/10.1016/j.jbankfin.2011.11.012
• Brooks, W., Dovis, A. (2019), Credit market frictions and trade liberalizations, “Journal of Monetary Economics”, 27 (3), pp. 1–16.
• Cartiglia, F. (1997), Credit constraints and human capital accumulation in the open economy, “Journal of International Economics”, 43 (1–2), pp. 221–236. https://doi.org/10.1016/S0022-1996(96)01469-9
• Chatterjee, A. (2017), Endogenous comparative advantage, gains from trade and symmetry-breaking, “Journal of International Economics”, 109 (November), pp. 102–115. https://doi.org/10.1016/j.jinteco.2017.08.009
• Choi, B. (2018), Financial development, endogenous dependence on external financing, and trade, “Economica”, March, pp. 1–58.
• Domenico, S., Emiliano, C., Alina, C. (2009), Human Capital and Openness to Foreign Trade: Evidence from the Enlarged Europe, “Analele Universităţii Din Oradea”, 7 (3), pp. 36–55.
• Edoumiekumo, S.G., Opukri, C.O. (2013), Economic growth factor in Nigeria: the role of global trade, “American Journal of Humanities and Social Sciences”, 1 (2), pp. 51–55. https://doi.org/10.11634/232907811301303
• Engel, D., Procher, V., Schmidt, C. (2013), Does firm heterogeneity affect foreign market entry and exit symmetrically? Empirical evidence from French firms, “The Word Economy”, 85 (1), pp. 37–47. https://doi.org/10.1016/j.jebo.2012.10.016
• Eryigit, S.B., Dulgeroglu, E. (2015), How to Measure the Level of Financial Development, [in:] Handbook of Research on Strategic Developments and Regulatory Practice in Global Finance, IGI Global, United States, pp. 260–286. https://doi.org/10.4018/978-1-4666-7288-8.ch017
• Evans, D., Green, C., Murinde, V. (2002), Human capital and financial development in economic growth: New evidence using the Translog Production Function, “International Journal of Finance and Economics”, 7 (2), pp. 123–140. https://doi.org/10.1002/ijfe.182
• Ezeoha, A.E., Cattaneo, N. (2012), FDI flows to Sub-Saharan Africa: the impact of finance, institutions and natural resource endowment, “Comparative Economic Studies”, 54 (3), pp. 597–632. https://doi.org/10.1057/ces.2012.18
• Fauceglia, D. (2015), Credit constraints, firm exports and financial development: Evidence from developing countries, “The Quarterly Review of Economics and Finance”, 55 (February), pp. 53–66. https://doi.org/10.1016/j.qref.2014.08.003
• Forlani, E. (2010), Liquidity constraints and firm’s export activity, Centro Studi Luca d’Agliano Working Papers 291. https://doi.org/10.2139/ssrn.1646950
• Gebrehiwot, G., Gebru, B. (2015), Ethiopia’s foreign trade potential: Inferences from a dynamic gravity approach, “International Journal of Economics and Business Research”, 9 (4), pp. 355–375. https://doi.org/10.1504/IJEBR.2015.069667
• Ghanbari, A., Ahmadi, M. (2017), The Effect of Innovation on Foreign trade: Selected Medium-High-Technology Industries, Evidence on Iran, “Iranian Economic Review”, 21 (1), pp. 21–44.
• Gokmenoglu, K.K., Amin, M.Y., Taspinar, N. (2015), The relationship among foreign trade, financial development and economic growth: the case of Pakistan, “Procedia Economics and Finance”, 25, pp. 489–496. https://doi.org/10.1016/S2212-5671(15)00761-3
• Grossman, G.M., Helpman, E. (1991), Trade, knowledge spill overs, and growth, “European Economic Review”, 35 (2–3), pp. 517–526. https://doi.org/10.1016/0014-2921(91)90153 A
• Hakeem, M., Oluwatoyin, O. (2012), Financial development and human capital in South Africa: a time-series approach, “Research in Applied Economics”, 4 (3), pp. 18–38. https://doi.org/10.5296/rae.v4i3.1498
• Hanh, P.T.H. (2010), Financial development, financial openness and trade openness: New evidence, FIW working paper Number 60.
• Haq, M., Luqman, M. (2014), The contribution of foreign trade to economic growth through human capital accumulation: Evidence from nine Asian countries, “Cogent Economics and Finance”, 2 (1), 947000. https://doi.org/10.1080/23322039.2014.947000
• Hassan, A.K., Islam, M.R. (2005), Temporal causality and dynamics of financial development, trade openness, and economic growth in Vector Auto Regression (VAR) for Bangladesh, 1974–2003: Implication for poverty reduction, “Journal of Nepalese Business Studies”, 2 (1), pp. 1–12. https://doi.org/10.3126/jnbs.v2i1.50
• Hur, J., Raj, M., Riyanto, Y.E. (2006), Finance and trade: A cross-country empirical analysis on the impact of financial development and asset tangibility on foreign trade, “World Development”, 34 (10), pp. 1728–1741. https://doi.org/10.1016/j.worlddev.2006.02.003
• Im, K.S., Pesaran, M.H., Shin, Y. (2003), Testing unit roots in heterogeneous panels, “Journal of Econometrics”, 115 (1), pp. 53–74. https://doi.org/10.1016/S0304-4076(03)00092-7
• International Monetary Fund (2015), World Economic Outlook: Adjusting to Lower Commodity Prices, Washington (October).
• Jafari, Y., Ismail, M.A., Kouhestani, M.S. (2011), Determinants of trade flows and D8 countries: Evidence from the Gravity Model, “Journal of Economic Cooperation and Development”, 32 (3), pp. 21–38.
• Kargbo, A.A., Ding, Y., Kargbo, M. (2016), Financial development, human capital and economic growth: New evidence from Sierra Leone, “Journal of Finance and Bank Management”, 4 (1), pp. 49–67.
• Kendall, J. (2007), The importance of local finance and human capital in regional growth: The case of India, University of California Santa Cruz, Job Market Paper.
• Kiendrebeogo, Y. (2013), How do banking crises affect bilateral exports?, “Empirical Economics”, 150, pp. 1–29. https://doi.org/10.5089/9781475576276.001
• Kumarasamy, D., Singh, P. (2018), Access to finance, financial development and firm ability to export: experience from Asia-Pacific countries, “Asian Economic Journal”, 32 (1), pp. 15–38. https://doi.org/10.1111/asej.12140
• Leibovici, F. (2018), Financial development and foreign trade, Federal Reserve Bank of St. Louis, Working Paper 2018–015A. https://doi.org/10.20955/es.2018.13
• Levin, A., Lin, C.F., Chu, C.S.J. (2002), Unit root tests in panel data: Asymptotic and finite-sample properties, “Journal of Econometrics”, 108 (1), pp. 1–24. https://doi.org/10.1016/S0304-4076(01)00098-7
• Lucas, R.E. (1988), On the Mechanics of Economic Development, “Journal of Monetary Economics”, 22 (1), pp. 3–42. https://doi.org/10.1016/0304-3932(88)90168-7
• Manova, K. (2013), Credit constraints, heterogeneous firms, and foreign trade, “Review of Economic Studies”, 80 (1), pp. 711–744. https://doi.org/10.1093/restud/rds036
• Mete, M., Bozgeyik, Y. (2017), An Empirical Investigation on Determinants of Foreign Trade in Turkey, “Expert Journal of Economics”, 5 (1), pp. 27–37.
• Minetti, R., Zhu, S. (2011), Credit constraints and firm export: microeconomic evidence from Italy, “Journal of International Economics”, 83 (1), pp. 109–125. https://doi.org/10.1016/j.jinteco.2010.12.004
• Muûls, M. (2012), Exporters, importers and credit constraints. Centre for Economic Performance, National Bank of Belgium Working Paper Number 139, October 2012.
• Owen, A.L. (1999), Foreign trade and the accumulation of human capital, “Southern Economic Journal”, 66 (1), pp. 61–81. https://doi.org/10.2307/1060835
• Paravisini, D., Rappoport, V., Schnabel, P., Wolfenson, D. (2011), Dissecting the effect of credit supply on trade: Evidence from matched credit-export data, NBER Working Paper 16975. https://doi.org/10.3386/w16975
• Patrick, H.T. (1966), Financial development and economic growth in underdeveloped countries, “Economic Development and Cultural Change”, 14 (2), pp. 174–189. https://doi.org/10.1086/450153
• Rajan, R., Zingales, L. (1998), Financial dependence and growth, “American Economic Review”, 88 (3), pp. 559–586.
• Rao, D.T., Mahale, K. (2011), Growth in Exports of Services of India Exogenous Human Capital, Labor Market Infirmities and Complementing Foreign Capital, “Transnational Corporations Review”, 3 (3), pp. 106–123. https://doi.org/10.1080/19186444.2011.11658301
• Samuelson, P.A. (2001), A Ricardo-Sraffa paradigm comparing gains from trade in inputs and finished goods, “Journal of Economic Literature”, 39 (4), pp. 1204–1214. https://doi.org/10.1257/jel.39.4.1204
• Schumpeter, J.A. (1934), The Theory of Economic Development: An Inquiry FTo Profits, Capital, Credit, interest, and the Business Cycle, Transaction Books, New Brunswick.
• Sehrawat, M., Giri, A.K. (2014), The relationship between financial development indicators and human development in India, “International Journal of Social Economics”, 41 (12), pp. 1194–1208. https://doi.org/10.1108/IJSE-11-2013-0268
• Shahbaz, M., Rahman, M.M. (2014), Exports, financial development and economic growth in Pakistan, “International Journal of Development Issues”, 13 (2), pp. 155–170. https://doi.org/10.1108/IJDI-09-2013-0065
• Spulber, D.F. (2008), Innovation and foreign trade in technology, “Journal of Economic Theory”, 138 (1), pp. 1–20. https://doi.org/10.1016/j.jet.2007.06.002
• Stokey, N.L. (1991), Human capital, product quality, and growth, “The Quarterly Journal of Economics”, 106 (1), pp. 587–616. https://doi.org/10.2307/2937948
• Tsaurai, K. (2017), Is foreign portfolio equity investment inspired growth hypothesis relevant in emerging markets?, “Euro Economica”, 36 (2), pp. 78–90.
• Tsaurai, K. (2018), Is the interaction between human capital and financial development one of the determinants of FDI in emerging markets?, “International Journal of Education Economics and Development”, 9 (1), pp. 24–37. https://doi.org/10.1504/IJEED.2018.10012161
• Ukenna, S., Ijeoma, N., Anionwu, C., Olise, M. (2010), Effect of Investment in Human Capital Development on Organisational Performance: Empirical Examination of the Perception of Small Business Owners in Nigeria, “European Journal of Economics, Finance and Administrative Sciences”, 1 (26), pp. 93–107.
• Uzagalieva, A., Cukrowski, J. (2006), Labor Market Flexibility, International Competitiveness and Patterns of Trade, “International Economics”, 59 (2), pp. 225–246.
• Vaubourg, A.G. (2016), Finance and foreign trade: A review of the literature, “Revue d’économie politique”, 126 (1), pp. 57–87. https://doi.org/10.3917/redp.261.0057
• Waqas, M., Shaheen, S., Awan, M.S., Aslam, M.A. (2011), Financial Development, Foreign trade and Economic Growth: Empirical Evidence from Pakistan, MPRA Paper No. 32876. https://doi.org/10.2139/ssrn.1950013
• Waugh, M.E. (2008), Human capital, product quality, and bilateral trade, Federal Reserve Bank of Minneapolis, Minnesota.
• Yakubu, A.S., Aboagye, A.Q., Mensah, L., Bokpin, G.A. (2018), Effect of financial development on foreign trade in Africa: Does measure of finance matter?, “The Journal of Foreign Trade and Economic Development”, 27 (8), pp. 917–936. https://doi.org/10.1080/09638199.2018.1474246
• Zaman, K., Izhar, Z., Mushtag Khan, M., Ahmad, M. (2012), The relationship between financial indicators and human development in Pakistan, “Economic Modeling”, 29 (5), pp. 1515–1523. https://doi.org/10.1016/j.econmod.2012.05.013

Identifiers

DOI

10.18778/1508-2008.23.28