Comparative Advantage, Demand for External Finance, and Financial Development

The differences in the levels of financial development between industrial and developing countries are large and persistent. Theoretical and empirical literature has argued that these differences are the source of comparative advantage and could therefore shape trade patterns. This paper points out...

Full description

Bibliographic Details
Main Authors:	Do, Quy-Toan, Levchenko, Andrei A.
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACTUAL VALUE AGGREGATE TRADE BILATERAL TRADE BILATERAL TRADE DATA CD CLOSED ECONOMY COMPARATIVE ADVANTAGE CREDIT MARKETS DEBT DOMESTIC MARKET EQUILIBRIUM EXCESS SUPPLY EXPECTED VALUE EXPORT PATTERNS EXPORT SECTORS EXPORT SHARE EXPORTS EXTERNAL FINANCE FACTOR ENDOWMENTS GDP GDP PER CAPITA GRAVITY EQUATION GRAVITY MODEL GRAVITY MODELS IMPACT OF TRADE IMPORTS INCOME INTEREST RATE INTEREST RATES INTERMEDIATE GOODS INTERNATIONAL TRADE LATIN AMERICAN LEGAL SYSTEM LIQUIDATION LIQUIDITY MARKET SIZE PANEL REPORTS PER CAPITA INCOME POLICY RESEARCH PRICE ELASTICITY REGRESSION ANALYSIS SPECIALIZATION TOTAL OUTPUT TRADE DATA TRADE LIBERALIZATION TRADE MEASURES TRADE OPENING TRADE OPENNESS TRADE PARTNERS TRADE PATTERN TRADE PATTERNS TRADE VALUES TRADE VOLUME TRADE VOLUMES UNDERESTIMATES UTILITY MAXIMIZATION WORLD TRADE
Online Access:	http://documents.worldbank.org/curated/en/2006/04/6731244/comparative-advantage-demand-external-finance-financial-development http://hdl.handle.net/10986/8716

id	okr-10986-8716
recordtype	oai_dc
spelling	okr-10986-87162021-04-23T14:02:40Z Comparative Advantage, Demand for External Finance, and Financial Development Do, Quy-Toan Levchenko, Andrei A. ACTUAL VALUE AGGREGATE TRADE BILATERAL TRADE BILATERAL TRADE DATA CD CLOSED ECONOMY COMPARATIVE ADVANTAGE CREDIT MARKETS DEBT DOMESTIC MARKET EQUILIBRIUM EXCESS SUPPLY EXPECTED VALUE EXPORT PATTERNS EXPORT SECTORS EXPORT SHARE EXPORTS EXTERNAL FINANCE FACTOR ENDOWMENTS GDP GDP PER CAPITA GRAVITY EQUATION GRAVITY MODEL GRAVITY MODELS IMPACT OF TRADE IMPORTS INCOME INTEREST RATE INTEREST RATES INTERMEDIATE GOODS INTERNATIONAL TRADE LATIN AMERICAN LEGAL SYSTEM LIQUIDATION LIQUIDITY MARKET SIZE PANEL REPORTS PER CAPITA INCOME POLICY RESEARCH PRICE ELASTICITY REGRESSION ANALYSIS SPECIALIZATION TOTAL OUTPUT TRADE DATA TRADE LIBERALIZATION TRADE MEASURES TRADE OPENING TRADE OPENNESS TRADE PARTNERS TRADE PATTERN TRADE PATTERNS TRADE VALUES TRADE VOLUME TRADE VOLUMES UNDERESTIMATES UTILITY MAXIMIZATION WORLD TRADE The differences in the levels of financial development between industrial and developing countries are large and persistent. Theoretical and empirical literature has argued that these differences are the source of comparative advantage and could therefore shape trade patterns. This paper points out the reverse link: financial development is influenced by comparative advantage. The authors illustrate this idea using a model in which a country's financial development is an equilibrium outcome of the economy's productive structure: financial systems are more developed in countries with large financially intensive sectors. After trade opening demand for external finance, and therefore financial development, are higher in a country that specializes in financially intensive goods. By contrast, financial development is lower in countries that primarily export goods which do not rely on external finance. The authors demonstrate this effect empirically using data on financial development and export patterns in a panel of 96 countries over the period 1970-99. Using trade data, they construct a summary measure of a country's external finance need of exports and relate it to the level of financial development. In order to overcome the simultaneity problem, they adopt a strategy in the spirit of Frankel and Romer (1999). The authors exploit sector-level bilateral trade data to construct, for each country and time period, a predicted value of external finance need of exports based on the estimated effect of geography variables on trade volumes across sectors. Their results indicate that financial development is an equilibrium outcome that depends strongly on a country's trade pattern. 2012-06-21T20:37:21Z 2012-06-21T20:37:21Z 2006-04 http://documents.worldbank.org/curated/en/2006/04/6731244/comparative-advantage-demand-external-finance-financial-development http://hdl.handle.net/10986/8716 English Policy Research Working Paper; No. 3889 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ACTUAL VALUE AGGREGATE TRADE BILATERAL TRADE BILATERAL TRADE DATA CD CLOSED ECONOMY COMPARATIVE ADVANTAGE CREDIT MARKETS DEBT DOMESTIC MARKET EQUILIBRIUM EXCESS SUPPLY EXPECTED VALUE EXPORT PATTERNS EXPORT SECTORS EXPORT SHARE EXPORTS EXTERNAL FINANCE FACTOR ENDOWMENTS GDP GDP PER CAPITA GRAVITY EQUATION GRAVITY MODEL GRAVITY MODELS IMPACT OF TRADE IMPORTS INCOME INTEREST RATE INTEREST RATES INTERMEDIATE GOODS INTERNATIONAL TRADE LATIN AMERICAN LEGAL SYSTEM LIQUIDATION LIQUIDITY MARKET SIZE PANEL REPORTS PER CAPITA INCOME POLICY RESEARCH PRICE ELASTICITY REGRESSION ANALYSIS SPECIALIZATION TOTAL OUTPUT TRADE DATA TRADE LIBERALIZATION TRADE MEASURES TRADE OPENING TRADE OPENNESS TRADE PARTNERS TRADE PATTERN TRADE PATTERNS TRADE VALUES TRADE VOLUME TRADE VOLUMES UNDERESTIMATES UTILITY MAXIMIZATION WORLD TRADE
spellingShingle	ACTUAL VALUE AGGREGATE TRADE BILATERAL TRADE BILATERAL TRADE DATA CD CLOSED ECONOMY COMPARATIVE ADVANTAGE CREDIT MARKETS DEBT DOMESTIC MARKET EQUILIBRIUM EXCESS SUPPLY EXPECTED VALUE EXPORT PATTERNS EXPORT SECTORS EXPORT SHARE EXPORTS EXTERNAL FINANCE FACTOR ENDOWMENTS GDP GDP PER CAPITA GRAVITY EQUATION GRAVITY MODEL GRAVITY MODELS IMPACT OF TRADE IMPORTS INCOME INTEREST RATE INTEREST RATES INTERMEDIATE GOODS INTERNATIONAL TRADE LATIN AMERICAN LEGAL SYSTEM LIQUIDATION LIQUIDITY MARKET SIZE PANEL REPORTS PER CAPITA INCOME POLICY RESEARCH PRICE ELASTICITY REGRESSION ANALYSIS SPECIALIZATION TOTAL OUTPUT TRADE DATA TRADE LIBERALIZATION TRADE MEASURES TRADE OPENING TRADE OPENNESS TRADE PARTNERS TRADE PATTERN TRADE PATTERNS TRADE VALUES TRADE VOLUME TRADE VOLUMES UNDERESTIMATES UTILITY MAXIMIZATION WORLD TRADE Do, Quy-Toan Levchenko, Andrei A. Comparative Advantage, Demand for External Finance, and Financial Development
relation	Policy Research Working Paper; No. 3889
description	The differences in the levels of financial development between industrial and developing countries are large and persistent. Theoretical and empirical literature has argued that these differences are the source of comparative advantage and could therefore shape trade patterns. This paper points out the reverse link: financial development is influenced by comparative advantage. The authors illustrate this idea using a model in which a country's financial development is an equilibrium outcome of the economy's productive structure: financial systems are more developed in countries with large financially intensive sectors. After trade opening demand for external finance, and therefore financial development, are higher in a country that specializes in financially intensive goods. By contrast, financial development is lower in countries that primarily export goods which do not rely on external finance. The authors demonstrate this effect empirically using data on financial development and export patterns in a panel of 96 countries over the period 1970-99. Using trade data, they construct a summary measure of a country's external finance need of exports and relate it to the level of financial development. In order to overcome the simultaneity problem, they adopt a strategy in the spirit of Frankel and Romer (1999). The authors exploit sector-level bilateral trade data to construct, for each country and time period, a predicted value of external finance need of exports based on the estimated effect of geography variables on trade volumes across sectors. Their results indicate that financial development is an equilibrium outcome that depends strongly on a country's trade pattern.
format	Publications & Research :: Policy Research Working Paper
author	Do, Quy-Toan Levchenko, Andrei A.
author_facet	Do, Quy-Toan Levchenko, Andrei A.
author_sort	Do, Quy-Toan
title	Comparative Advantage, Demand for External Finance, and Financial Development
title_short	Comparative Advantage, Demand for External Finance, and Financial Development
title_full	Comparative Advantage, Demand for External Finance, and Financial Development
title_fullStr	Comparative Advantage, Demand for External Finance, and Financial Development
title_full_unstemmed	Comparative Advantage, Demand for External Finance, and Financial Development
title_sort	comparative advantage, demand for external finance, and financial development
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2006/04/6731244/comparative-advantage-demand-external-finance-financial-development http://hdl.handle.net/10986/8716
_version_	1764405849456902144

Comparative Advantage, Demand for External Finance, and Financial Development

Similar Items