Financial Development and International Trade inside Asia

Abstract

This study attempts to document the impact of "Financial development" on international trade between selected Asian economies and rest of the Asian region. Financial development index is used to represent financial development level which includes four dimensions from two perspectives; institutional and market. An "overall financial development index" is calculated by combining institutional and market level financial development indices. Effect of market and institutional dimension is measured separately on international trade of Asian economies with rest of the Asia. Different macro-variables are controlled including GDP per capita, total population, Inward FDI flow, Outward FDI flow and real effective exchange rates for modeling. Sample includes data for twenty years ranging from 1997-2016 for 16 large economies of Asia. Panel data modeling technique "fixed effects regression" is used with two different proxies of dependent variable. "Overall financial development" is found to have positive and significant relationship with international trade. Study confirms the robustness of the results to different measures of international trade. Results from fixed effects model confirm positive and significant relationship between all components of financial development and international trade, and between overall financial development and international trade in Asian economies. Singapore, Japan and South Korea represent highest levels of financial development while other countries showed relatively less development financial development level according to measure used in this study. An important policy implication is if a country wants to grow economically by using instrument of trade policy especially exports improvement, then it has to develop its financial system to efficiently fulfill "international trade finance" needs.

Keywords: Financial Development Index, International Trade, Asia

DOI: 10.7176/EJBM/11-11-04

Publication date: April 30^th 2019