Essays on Capital Account Liberalization, Growth and International Trade

Abstract

This dissertation comprises three papers on the impact of capital account liberalization on the economy from three perspectives: consumption growth, firm performance, and the export industry. It employs instrument variable (IV) models to mitigate potential endogeneity biases. Though acquiring a valid instrument for this purpose can be challenging and time-consuming, it consistently conducts endogeneity tests and overidentification restriction tests to ensure the validity and appropriateness of the instruments.

Abstract Chapter 1 focuses on the extent to which a country with larger trade openness benefits from capital account liberalization. It explores the impact of capital account liberalization associated with trade openness on consumption growth. It uses panel data from 141 countries between 1970 and 2019 to explore the impact of capital account liberalization associated with trade openness on consumption growth. Findings show that a country with larger trade openness experienced smaller consumption growth after capital account liberalization. It underscores the importance of liberalizing capital accounts within each country’s economic framework and trade openness level.

Abstract Chapter 2 examines how firms in liberalized countries benefit from capital account liberalization. Using a large dataset covering 106 countries from 1980 to 2019, it investigates the effect of capital account liberalization on firm performance. The results show that firms’ performance improved after capital account liberalization, characterized by grown profitability and reduced leverage. It shows the significance of the well-developed financial markets of liberalized countries for firms’ performance. It highlights the need for domestic economic development, especially for low-income countries, to strengthen the effects of capital liberalization on firm performance.

Abstract Chapter 3 investigates the influence of capital account liberalization on firms’ decisions to enter the export market (extensive margin) and the volume of exports (intensive margin). Substantial initial investments and fixed operational costs often hinder entry into export markets, compounded by financial constraints. This chapter uses a sizeable firm-level dataset from 2006 to 2023 across 169 countries. It uses advanced econometric models to address endogeneity concerns, including the IV-Probit and IV-2SLS models. The findings show that capital account liberalization significantly enhances firms’ likelihood of engaging in export activities, particularly for foreign-owned entities. It also identifies a positive correlation between capital account liberalization and the intensive margin of trade, particularly among firms reliant on external capital for asset financing. It underscores the potential of capital account liberalization to incentivize market penetration and alleviate financial constraints inhibiting firms’ participation in international trade.