Impact of Financial Development on Export Diversification in Developing Selected Countries

Document Type : Research Paper

Authors

1 Ph.D. Candidate of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran.

2 Associate Professor of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran.

10.22103/jdc.2022.19782.1268

Abstract

Objective: The positive role of export diversification in economic growth and productivity has been proven also at the micro level, It has been proven that export diversification is effective on innovation and improving the quality of manufactured goods.Researchers are now focusing on the factors such as R&D, financial development and innovation influencing this relationship. For the past few decades, discussions about the impact of financial development on trade and business patterns have been discussed among economists But there is no similarity in terms of how effective it is and in which economies it has a positive effect.This study examines the effect of financial development on the export diversification of selected developing countries, including Iran, in terms of  domestic credit to the private sector and broad money indicators, and the effect of the control variables of exchange cost, foreign direct investment, fixed capital formation, and the degree of trade openness on the export diversification.
Method: In this study, the data from 54 developing countries related to 2005-2018 were analyzed using the Arellano-Bover/ Blundel-Bond two-step dynamic panel data (DPD) method based on generalized method of moments (GMM). The values of the dependent variable (export diversification) are normalized by the method of Finger and Krinin (1979) for all the countries included in the research and are in the range of zero and one. This index is obtained from the absolute deviation of each country's trade structure with the global trade structure. Therefore, the greater the difference, the less variety, and the smaller the difference, the more variety there is in the country's exports. Because the value close to one shows a greater distance with the global export pattern, as a result, that country has less export diversity. For this reason, whenever a variable has a positive relationship with the export diversification index, with its increase, the index number increases, but the export diversification decreases. There are different measuring units of independent (explanatory) variables and dispersion among the data, in order to obtain uniform and integrated data from the minimum-maximum method, the data of the independent variables are normalized so that all variables have values between zero and one. Data normalization is a method to make the range of values of different variables uniform so that the results of statistical analysis have more power.
Results: Indicators of financial development, i.e. credit to the private sector and broad money, have a positive effect on export diversification in developing countries.Therefore, it shows that financial development has a significant positive effect on export diversity in developing countries, but the third model shows that the dominant policy in these countries was based on liquidity growth .The variables of exchange cost, foreign direct investment, and trade openness have a positive effect on export diversification. This means that the developing countries seeking export diversification should strive to make financial reforms to provide ground for attracting foreign investment and creating an open commercial environment.
Conclusion: Conclusions had showed export diversification has been declining over time in developing countries and has moved away from global export diversification but the growth of export diversification in developing countries every year will increase the diversity of exports in the coming year and will act as a driving factor.The financial development has a positive and significant effect on export diversification in developing countries, the control variables of foreign direct investment, exchange cost and  trade openness in the studied period have a positive and significant effect on the export diversification in developing countries, with the explanation that the index coefficient of trade openness, which is obtained from the ratio of trade to production, has a value of It is a larger number and therefore more important compared to other variables which shows governments should consider financial, economical and commercial reforms while implementing to increase export diversification and economic growth more rapidly. The variable of fixed capital formation is significant, but contrary to expectations, it has reduced the diversity of exports, which is affected by the structure of production and exports in developing countries.

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Main Subjects

References

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Journal of Development and Capital
Volume 8, Issue 1 - Serial Number 14
September 2023
Pages 45-62

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History

  • Receive Date: 30 June 2022
  • Revise Date: 17 August 2022
  • Accept Date: 21 August 2022

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