The Impact of International Financial Integration on Industry Growth

The empirical relationship between financial openness and growth is examined in this paper. In contrast to a large body of cross-country work investigating this link, I study the impact of financial integration on growth at the industry level. This paper provides evidence that financial openness has a positive effect on growth of industrial sectors, regardless of their characteristics. Moreover, industries that rely relatively more on external finance grow disproportionately faster in countries with more integrated financial systems. However, this industry-specific effect of financial openness decreases when I control for the development of the domestic financial system. Finally, the hypothesis that financial integration improved growth also by enhancing the functioning of the domestic financial system is tested. I find evidence of this indirect transmission channel of financial openness.