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Is Financial Development Another Source of Comparative Advantage? Evidence from China

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  • Qun Bao
  • Jiayu Yang

Abstract

Using panel data for 29 provinces in China during 1990–2004, the present paper attempts to explore a possible link between financial development and China's foreign trade. Three measures of comparative advantage in manufactured goods have been applied in our study, including Balassa's revealed comparative advantage, the net manufactured export index, and the Michaely index. We also use four indicators of financial development to identify the different functions of regional financial development, and to determine both size and efficiency features of financial institutions. The estimation results suggest that besides factor endowments, foreign firms and infrastructure, financial development has a quantitatively large and robust effect on China's manufactured goods trade. Therefore, further reform of China's financial system should be encouraged to fully exploit the comparative advantage of China's foreign trade.

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  • Qun Bao & Jiayu Yang, 2009. "Is Financial Development Another Source of Comparative Advantage? Evidence from China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(2), pages 15-34, March.
    • Handle: RePEc:bla:chinae:v:17:y:2009:i:2:p:15-34
    DOI: 10.1111/j.1749-124X.2009.01139.x
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    2. Binglin Gong & Haiwen Zhou, 2014. "Financial development, the choice of technology, and comparative advantage," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(8), pages 1238-1261, December.

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