Financial Globalisation and Sectoral Reallocation of Capital in South Africa

The study examines the impact of financial globalisation on intra-sector and inter-sector firm level reallocation of capital in South Africa using panel data for the period 1991-2008. The measure of efficient reallocation of capital is based on the variation of firm's marginal returns to capital around the optimal level, while the measure of financial globalisation is constructed by tracing the financial reforms/restrictions that took place in South Africa since the 1970s. We find that financial globalisation is associated with a reduction of the dispersion of firms' marginal returns around their sectoral steady states suggesting that financial globalisation enhances efficient reallocation of capital. The benefits of financial globalisation seem to be stronger at the intersector rather than intra-sector level, implying that the implicit/explicit barriers to free movement of capital across firms in different sectors may limit the benefits of financial globalisation. Further results show that quality institutions are a pre-requisite if the efficiency gains from financial globalisation are to be realised. Finally, there is evidence to suggest that the benefits of financial globalisation may also manifest indirectly through its role in augmenting the domestic financial system.