Dissertation > Economic > Fiscal, monetary > Finance, banking > World of finance, banking > International financial relations

Financial Integration and Total Factor Productivity

Author LiChangKe
Tutor CuiYuanZuo
School Zhejiang Technology and Business University
Course Finance
Keywords financial integration total factor productivity developmentlevel
CLC F831.6
Type Master's thesis
Year 2013
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Under the background of globalization, how to organize the progress of financial integration orderly is one problem of all countries, particularly developing countries, must face. Just as Tarapore (1998) said:"If countries don’t plan for an orderly integration with the world economy, the world will integrate with them in a manner, which gives them no control over events". Financial integration can accelerate economic growth through capital accumulation and total factor productivity promotion in general theory, while a large number of empirical literature do not reach a consensus about this. One of the deficiency of existing literatures is fall to identify the middle channel, and pay less attention to the threshold effect. Thus, to study the relationship between financial integration and total factor productivity on different development level has important academic value and practical significanceBased on a systematic review of existing literature, this paper discusses the measurement of financial integration, the channel through which financial integration act on total factor productivity, and use the non-parametric estimation of data envelopment analysis to calculates the total factor productivity growth. Further, the paper tests the relationship between financial integration and total factor productivity using panel data model based on the data of80countries during1975-2010. In order to test whether the effect depends on the development level, I both use split sample and interaction term. And for robust test, I use the three composition of capital flow, namely FDI, Equity capital and debt capital, as alternative measurement of financial integration, and use the5-years average data in order to smooth the business cycle, both prove the robustness of the result.The most important finding is that the effect of financial integration on total factor productivity varies according to the level of development. Specifically, financial integration can promote total factor productivity in developing country, while opposite in developed country. This means a kind of threshold effect contradict to the conventional threshold effect. I explain this by the difference of embedded technology of cross-border capital. Further, FDI and debt capital is the main form of promoting productivity improvement in developing countries, equity capital has no significant effect, while for developed countries, different type of capital seems the same.

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