The Effects of Capital Flows and Openness on Financial Development in Emerging Markets

  • Siong Hook Law
Part of the Centre for the Study of Emerging Markets Series book series (CSEM)


Financial markets and institutions perform an important function in the economic development process, particularly through their role in allocating finance to various productive activities, including investment in new plant and equipment, working capital for firms and so on. This role has been well researched and documented in the empirical literature, using a variety of econometric techniques. By and large, empirical studies suggest that well-functioning financial institutions and markets promote long-run economic growth . provides an excellent overview of a large body of empirical literature that suggests that financial development can robustly explain differences in economic growth across countries. A country with better-developed financial markets tends to grow faster. Thus, establishing well-functioning financial markets and systems, which attract more savings, should be a policy priority for governments.


Foreign Direct Investment Financial Development Trade Openness Capital Flow Capital Inflow 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Acemoglu, D., S. Johnson and J.A. Robinson (2001) ‘The Colonial Origins of Comparative Development: An Empirical Investigation’, American Economic Review, 91, 1369–1401.CrossRefGoogle Scholar
  2. Arestis, P. and P. Demetriades (1997) ‘Financial Development and Economic Growth: Assessing the Evidence’, Economic Journal, 107, 783–799.CrossRefGoogle Scholar
  3. Beck, T. (2001) Financial Development and International Trade. Is There a Link? World Bank Group Working Paper, no. 2608.Google Scholar
  4. Beck, T., A. Demirguc-Kunt and R. Levine (1999) A New Database on Financial Development and Structure, World Bank Group Working Paper. no. 2784.Google Scholar
  5. Beck, T., A. Demirguc-Kunt and R. Levine (2003) ‘Law, Endowment and Finance’, Journal of Financial Economics, 70, 137–181.CrossRefGoogle Scholar
  6. Chinn, M. and H. Ito (2002) ‘Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence’, NBER Working Paper no. 8967.Google Scholar
  7. Demetriades, P. and S. Andrianova (2004) ‘Finance and Growth: What We Know and What We Need to Know’, in Discussion Papers in Economics No 03/15, University of Leicester, UK.Google Scholar
  8. Demirguc-Kunt, A. and V. Maksimovic (1998) ‘Law, Finance and Firm Growth’, Journal of Finance, 53, 2107–37.CrossRefGoogle Scholar
  9. Do, Q. and A.A. Levchenko (2004) Trade and Financial Development, Graduate Research Paper, Department of Economics, MIT.CrossRefGoogle Scholar
  10. Engle, R.F. and W.J. Granger (1987) ‘Cointegration and Error-Correction: Representation, Estimation and Testing’, Econometrica, 35, 251–76.CrossRefGoogle Scholar
  11. Hausman, J. (1978) ‘Specification Tests in Econometrics’, Econometrica, 46, 1251–71.CrossRefGoogle Scholar
  12. Honohan, P. (2004) ‘Financial Development, Growth and Poverty: How close are the Links?’ in C. Goodhart (eds), Financial Development and Economic Growth: Explaining the Links, 1–37, Palgrave Macmillan, Basingstoke.Google Scholar
  13. Im, K.S., M.H. Pesaran and Y. Shin (1997) ‘Testing for Unit Roots in Heterogeneous Panels’, mimeo, Department of Applied Economics, Cambridge University.Google Scholar
  14. Im, K.S., M.H. Pesaran and Y. Shin (2003) ‘Testing for Unit Roots in Heterogeneous Panels’, Journal of Econometrics, 115, 53–74.CrossRefGoogle Scholar
  15. King, R.G. and R. Levine (1993a) ‘Finance and Growth: Schumpeter Might be Right’, Quarterly Journal of Economics, 108, 717–37.CrossRefGoogle Scholar
  16. King, R.G., R. Levine (1993b) ‘Finance, Entrepreneurship and Growth’, Journal of Monetary Economics, 32, 1–30.CrossRefGoogle Scholar
  17. Klein, M. and G. Olivei (1999) ‘Capital Account Liberalization, Financial Depth and Economic Growth’, Federal Reserve Bank of Boston Working Paper no. 99–6.Google Scholar
  18. Knack, S. and P. Keefer (1995) ‘Institutions and Economic Performance: Crosscountry Tests Using Alternative Institutional Measures’, Economics and Politics, 7, 207–27.CrossRefGoogle Scholar
  19. La Porta, R., F. Lopez-de-Silane, A. Shleifer and R.W. Vishny (1997) ‘Legal Determinants of External Finance’, Journal of Finance, 52, 1131–50CrossRefGoogle Scholar
  20. Levine, R. (1997) ‘Financial Development and Economic Growth: Views and Agenda’, Journal of Economic Literature, 35, 688–726.Google Scholar
  21. Levine, R. (2001) ‘International Financial Liberalization and Economic Growth’, Review of International Economics, 9, 688–702.CrossRefGoogle Scholar
  22. Levine, R. (2003) ‘More on Finance and Growth: More Finance, More Growth?’, Federal Reserve Bank of St. Louis Review, 85(4), 31–46.Google Scholar
  23. McKinnon, R.I. (1991) The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy. Baltimore, MD: Johns Hopkins University Press.Google Scholar
  24. Pedroni, P. (1997) Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests, with an Application to the PPP Hypothesis; New Results, Department of Economics Working Paper, Indiana University.Google Scholar
  25. Pedroni, P. (1999) ‘Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors’, Oxford Bulletin of Economics and Statistics, 61, 653–70.CrossRefGoogle Scholar
  26. Pesaran, M.H. and R.P. Smith (1995) ‘Estimating Long-run Relationship from Dynamic Heterogeneous Panels’, Journal of Econometrics, 68, 79–113.CrossRefGoogle Scholar
  27. Pesaran, M.H., Y. Shin and R.P. Smith (1999) ‘Pooled Mean Group Estimation of Dynamic Heterogeneous Panels’, Journal of the American Statistical Association, 94, 621–634.CrossRefGoogle Scholar
  28. Rajan, R.G. and L. Zingales (1998) ‘Financial Dependence and Growth’, American Economic Review, 88, 559–86.Google Scholar
  29. Rajan, R.G. and L. Zingales (2003) ‘The Great Reversals: The Politics of Financial Development in the Twentieth Century’, Journal of Financial Economics, 69, 5–50.CrossRefGoogle Scholar
  30. Svaleryd, H. and J. Valchos (2002) ‘Markets for Risk and Openness to Trade: How are they Related’, Journal of International Economics, 57, 369–395.CrossRefGoogle Scholar
  31. World Development Indicators (2003) World Bank, Washington, DC.Google Scholar

Copyright information

© Siong Hook Law 2005

Authors and Affiliations

  • Siong Hook Law

There are no affiliations available

Personalised recommendations