The Effect of Financial Integration on Total Factor Productivity : Innovation with Spillover?

The spillover effect of financial integration has been a buzz unsolved for decades. Empirical tests with different datasets have significant conflict. Micro-datasets tend to obtain robust significant evidence, while macro-datasets can hardly get significant regressors. In this paper, we conclude the definition of spillover effect from those micro-empirical evidence and suggest a hypothesis that the advantage of backwardness is the necessary condition of the spillover effect. By developing a conditional stochastic innovation system and SGMM method, we obtain robust evidence with macro-cross country panel dataset. The result indicates that financial integration can foster significant innovation only together with the advantage of backwardness to identify the spillover effect of financial integration