Testing for Trade-Induced Investment-Led Growth

This paper estimates a two equation system – an investment equation and a growth equation – that allows trade openness to affect growth directly via its impact on TFP growth, and indirectly via its impact on the investment rate. We find that domestic trade barriers depress investment and thereby growth. This result is robust in that it is present in a variety of samples and for a variety of openness proxies. Foreign trade barriers are also found to depress investment and growth, but the effect is less strong and much less robust to sample and proxy changes. We confirm the robustness of our results by using a series of data samples split according to the capital abundance of nations and the income levels of countries. Moreover, we deal with the Rodriguez-Rodrik critique by using, as our preferred trade proxy, a trade weighted tariff average.