The approach that I follow in this last section ties in well with the literature identi…ed by Kose et al. (2006), who emphasize the importance of TFP growth as the main driver of long-term growth. However, at the end of the day, if de facto …nancial openness is to have permanent e¤ects on growth, it must push up the production possibility frontier.
The literature has argued that "total" foreign direct investment may bring new technology and management techniques that increase the e¢ciency of "acquired" …rms and generate economy-wide spillovers. For example, Mishkin (2006) has argued that developing coun-tries can import greater e¢ciency by allowing foreign investors to take controlling stakes in domestic …nancial …rms, and thereby bring in state-of-the-art …nancial intermediation practices. Recently, Henry (2007) has even stated that "these stories are plausible but empirically unsubstantiated". Surprisingly, research on whether …nancial openness raises TFP is scarce. Recent exceptions are Edwards (2001) who concludes that the evidence is not robust; and Bon…glioli (2007), who shows that …nancial integration has a positive direct e¤ect on productivity, albeit with the use of a dummy variable to proxy for …nancial integration. In addition, the empirical literature on the spillover e¤ects of FDI also gives mixed results. For example, some studies argue that foreign ownership has a positive e¤ect on productivity for domestic …rms and industries (see Barrell and Pain, 1997); while other studies …nd little or no evidence of spillover e¤ects stemming from FDI (see Aitken and Harrison, 1999).
The results of the TFP-regressions for both developing and developed economies in Table 5 tend to support Mishkin’s story. First, FDI in‡ows do contribute to TFP growth for both types of economies (see speci…cation 5:1 and 6:1). Second, portfolio in‡ows do not have a signi…cant e¤ect for developing economies (speci…cation 5:2), while portfolio in‡ows do have a positive e¤ect on TFP growth for developed economies (see speci…cation 6:2).13 Third, threshold e¤ects in terms of human capital do not improve the explanation of TFP growth.14
Table 5: De facto Financial Openness and TFP for Developing and Developed Economies Dependent variable: TFP growth
Developing & Emerging Markets Developed Economies
5:1 5:2 5:3 6:1 6:2 6:3
TFP growtht 1 0.152 0.132 0.130 -0.157 -0.170 -0.142
(0.085) (0.074) (0.085) (0.083) (0.095) (0.088)
Initial GDPpc -2.481 -2.337 -2.222 -2.110 -2.108 -2.709
(0.895) (0.881) (0.919) (0.994) (0.970) (1.022)
Human Capital 0.078 0.068 0.108 0.025 0.022 0.055
(0.052) (0.053) (0.053) (0.016) (0.018) (0.022) US Real Int. Rate -0.235 -0.229 -0.248 -0.122 -0.136 -0.123
(0.112) (0.121) (0.111) (0.054) (0.064) (0.056)
(G/Y) -0.056 -0.052 -0.041 -0.284 -0.300 -0.350
(0.065) (0.061) (0.060) (0.086) (0.076) (0.087)
FDI In‡ows 0.212 0.236 0.423 0.173 0.647
(0.111) (0.134) (0.214) (0.063) (0.362)
observations 209 204 209 126 127 126
Notes: bootstrapped standard errors in parenthesis;
*, **, ***are 10%, 5%, 1% signi…cant levels respectively
13In Table 5 I only report the individual e¤ect of portfolio in‡ows for developed economies. When I include both FDI and portfolio in‡ows, then both coe¢cients become non-signi…cant.
14For theBRICplus economies, FDI in‡ows continue to have positive e¤ects on TFP growth (but only at the 10% signi…cance). For all other economies the results are the same, and positively signi…cant at standard levels.
7 Conclusions
In order to understand the total e¤ect of …nancial openness on economic growth, it is important to know the channels and the directionality through which such policies a¤ect an economy. Furthermore, it is important to take into account the possibility that …nancial openness a¤ects countries di¤erently (this is especially true for developed versus developing economies). In this light, this paper has probed deeper into the aforementioned relationship by studying separately the impact of de facto …nancial openness on economic growth and its components. By studying the direct and indirect channels of de facto …nancial openness, I …nd that FDI in‡ows positively a¤ect GDP per worker growth and that these in‡ows also a¤ect capital accumulation positively with (non-robust) evidence of crowding-in e¤ects, mirrorcrowding-ing the Borensztecrowding-in et al. (1998) results. When it comes to developed economies, the results show that FDI and portfolio in‡ows both play a signi…cant and positive role in stimulating the growth rate of GDP per worker. As far as the growth rate of the capital stock per worker, the results for advanced economies show that only portfolio in‡ows matter for capital accumulation with crowding-in e¤ects on domestic investment. The one similarity between developed and developing economies relates to the TFP regression results, which show that there is a signi…cant and positive correlation between FDI in‡ows and TFP for both types of economies. The paper also …nds evidence in favor of the importance of "relative backwardness" for the speed of adoption of new technologies and spillover bene…ts. This suggests that the greater the technological distance between the "less advanced" host economy and the "advanced" home country, the greater the available opportunities to exploit in the host country, and therefore, the more rapidly
"new technologies" are adopted. From a policy perspective, while the literature suggests that transitional risks are associated with …nancial openness, this paper shows that resisting de facto…nancial openness (especially in terms of FDI in‡ows) over an extended period may prove counterproductive. One possible strategy is to try to mitigate the down-side risks associated with an open capital account (see Garita and Zhou, 2009). In this light, sound domestic policies and institutions, a regulatory framework promoting a strong and e¢cient
…nancial sector, and e¤ective systems and procedures for monitoring capital ‡ows greatly improve the chances of ensuring that capital in‡ows foster sustainable growth. Therefore, counter-intuitive as it may seem (especially given the severe economic downturn that is gripping the world economy), more and not less …nancial openness is the way forward;
however, only if it is initially done by attracting long-term investment ‡ows, while keeping a close watch on short-term capital ‡ows.
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