Does Openness to International Financial Flows Raise Productivity Growth?

IMF Working Papers, October 1, 2008

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The paper provides a comprehensive analysis of the relationship between financial openness and total factor productivity (TFP) growth using an extensive dataset that includes various measures of productivity and financial openness for a large sample of countries.
De jure capital account openness has a robust positive effect on TFP growth.
The effect of de facto financial integration on TFP growth is less clear; however, this masks an important and novel result:
- Foreign direct investment (FDI) liabilities boost TFP growth.
- Portfolio equity liabilities boost TFP growth.
- External debt liabilities are negatively correlated with TFP growth.
The negative relationship between external debt liabilities and TFP growth is attenuated in economies with higher levels of financial development and better institutions.

Subject: Capital account, Financial integration, Foreign direct investment, Stocks, Total factor productivity
Keywords: debt liability, equity liability, TFP calculation, TFP growth, TFP measure, WP

Uses an extensive dataset covering a large sample of countries and various measures of productivity and financial openness.
Distinguishes between de jure measures of capital account openness and de facto measures of financial integration.
Emphasizes disaggregated external liabilities (FDI, portfolio equity, external debt) in evaluating relationships with TFP growth.
Highlights the role of domestic financial development and institutional quality in moderating the effects of external debt liabilities on TFP growth.

Source: IMF Working Papers page for "Does Openness to International Financial Flows Raise Productivity Growth?"