Revisit the nexus of trade openness and GDP growth: Does the financial system matter?

This study empirically investigates whether financial development is associated with a stronger or weaker trade openness-growth relationship. Both linear and nonlinear econometric models are used with panel data for 46 countries from 1983 to 2007. While the new growth theory holds that international trade may spur economic growth by facilitating the adoption of new technology and specialization, the evidence of this study suggests that, to take full advantage of the technology transfer induced by international trade, countries need to develop their financial systems, especially their stock markets. The empirical results indicate that in countries with higher stock market development more trade openness enhances economic growth, while in countries with less stock market development the ability of trade to facilitate growth is feeble.