Effects of Financial and Trade Globalization on Total Factor Productivity Growth in Emerging Economies

ABSTRACT

This article considers the annual sample from 1984 to 2019 in a panel dataset of 20 emerging economies (i.e. Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, the Philippines, Poland, Saudi Arabia, South Africa, Thailand, and Turkey) given by Morgan Stanley Capital International (MSCI), to explore the effects of trade and financial globalization on total factor productivity (TFP) growth. It considers domestic credit to the private sector by banks as a percentage of gross domestic product (GDP), labor force, and total gross fixed capital formation as a percentage of GDP as control variables in the total factor productivity function. The article considers the direct effects of trade and financial globalization. It also checks the moderating impact of domestic credit on TFP. The long-run estimation shows that domestic credit, labor force, and financial globalization reduce TFP growth, whereas investments and trade globalization enhance it. Interestingly, their moderating effect enhances TFP in the long run. The policy implications are also discussed.

KEYWORDS:

• Total factor productivity
• financial globalization
• trade globalization
• emerging economies

JEL:

• D24
• G2
• F60
• O57

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, the Philippines, Poland, Saudi Arabia, South Africa, Thailand, and Turkey.

2. TFP growth comes from the factors of production used. These factors include land, labor, capital, organization, and technology. This study employs domestic credit, trade globalization, financial globalization, and gross fixed capital formation as determinants of TFP growth. It is essential to define these determinants. First, one can understand bank credit when banks extend loans to private sectors to support their business investment. Second, trade globalization is understood when no restriction is imposed on countries while exporting and importing commodities. Third, financial globalization helps countries to receive inflows of personal remittances and foreign direct investment. Fourth, it allows governments to send labor and domestic firms to other countries for employment and investment. Finally, gross fixed capital formation is the total fixed assets created by the government of an economy.