The Effects of Financial Development on Trade Performance and the Role of Institutions

This paper aims to address the empirical question of whether a country's level of manufacturing trade is affected by its financial sector development and to investigate the role of institutions in this relationship. Countries endowed with better-developed financial systems tend to specialize in industries that rely on ex- ternal fi nance in production. This e ffect is likely to be stronger in countries with high-quality institutions. Using pure cross-sectional and panel speci fications on a sample of 75 countries over the period 1971-2010, we find that financial development strongly and robustly exerts a positive eff ect on manufacturing exports, even after controlling for the eff ect of banking crises. Furthermore, institutional quality is found to have a favorable eff ect on the extent to which finance influences manufacturing trade, suggesting a multiplicity of experiences of the largest exporters of manufactured goods.