Financial Development In International Trade: Theory And Empirical Research

The theory of financial development argues that financial development canaccelerate economic growth by optimizing the allocation of resources in thedeveloping countries. This theory is very significant to the developing countries. Onthe other hand, the theory of international trade has proved that international trade isone of engines of economic growth. By optimizing the allocation of resources in oneeconomy, free international trade can accelerate its economic growth. However, is there a link between financial development and international trade?Can financial development accelerate the development of international trade? If theanswer is yes, what are the means and mechanism by which the financial developmentcan affect the development of international trade? All the questions above are almostignored in the previous literature, which is the insufficiency of the theory of financialdevelopment. The dissertation focuses the relation between the two, and explores theemerging topic theoretically and empirically. There are seven chapters in this dissertation. The first chapter is the introductionof previous researches about economic growth in the theory of financial developmentand international trade, after which the main topic of the dissertation is put forward.The following three chapters (from Chapter2 to Chapter5) are organized as follows:Firstly, we study the distortion of international trade due to financial repression.Secondly, the impacts of financial restraint on international trade are examined andcommented. Thirdly, we explore how the financial development promotes theinternational trade. Finally, the impacts of the exchange rate system's changes oninternational trade are explored. In Chapter 6, we test the theory of the relationbetween financial development and international trade developed in previous chaptersby econometric methods. In Chapter 7, we analyze and test the relationship betweenfinancial development and international trade in China after 1978, in which yearChina began its reform and opening to the outside world. The main research work andresearch conclusion are as follows: IIThis dissertation studies systematically the impacts that financial developmentmay have on international trade, including three stages: financial repression, financialrestraint, and financial development. The conclusion is that financial development canaffect international trade in many aspects. This dissertation makes a systematic study on the distortion of financialrepression on international trade and the active impacts that financial restraint mayhave on international trade. But the benefits of financial restraint on internationaltrade shouldn't be overstated. This dissertation makes a cross-country empirical study on the relationshipbetween financial development and international trade, the results confirm therelationship between them in theory. This dissertation makes a systematic study firstly on the relationship betweenfinancial development and international trade in China after 1978. We find there is norelation between them in the long run, and the reasons are explained.