Effects of financial integration on developing economies

This thesis focuses on the effects of financial openness on GDP growth in developing economies. This work is a follow up on earlier research on financial openness, where the effects of financial integration on GDP growth were mixed results have been found. Previous articles stressed the presence of “threshold” conditions. This indicates that economies need to attain a certain level of development for financial integration to have a positive effect. These threshold conditions consist of corruption, strength of legal rights and institutional strength. Despite the lack of data on these “threshold” variables, the effects of financial integration over the long-term are examined, and also excluding the 2007 credit-crisis. Other studies also demonstrated differences in outcome of research into financial integration with various methods of measuring financial integration. Tests are done with 3 different measures of financial openness, to see if there is evidence that financial integration has a significant positive effect on GDP growth. The various measures of financial integration give mixed results. Looking at earlier studies of this subject, the same results can be observed, the effect of financial integration remains unclear and further study with emphasis on the threshold effects is needed