Modelling the causal linkages between trade openness, innovation, financial development and economic growth in OECD Countries

ABSTRACT

Using a panel vector auto-regressive model, we study interactions between trade openness, innovation, financial development, and economic growth in 27 OECD countries between 2001–2016. We focus on four-way linkage between these variables. Our empirical results show that there is a neutral relationship between economic growth and innovation, between innovation and financial development and between innovation and trade. Similarly, we have found a unidirectional relationship between economic growth and financial development and between financial development and trade. Finally, our results show a bidirectional relationship between economic growth and trade. Our empirical results show that among all, policy-makers need to invest more in human capital both in terms of developing entrepreneurial skills and education as well as creating better conditions for the development of creativity in the economy in order to improve national absorptive capabilities and develop the innovation potential of their economies.

KEYWORDS:

• Panel VAR modelling
• trade openness
• innovation
• economic growth
• financial development

JEL CLASSIFICATION:

• C33
• O42
• E44
• F43

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Details about the estimation could not be included but are available from the authors upon request.