Investigating Asymmetric Relationship between Financial Development and Global Competitiveness in Developed and Developing Countries

Abstract

Globalization led to economic integration, which increased the competitiveness of economies through interconnection and interdependence. Financial Development (FD) is considered as an engine of Economic Growth (EG) that significantly contributes in economic productivity and raising prosperity in an economy. This study aims to analyze the relationship between FD and global competitiveness from a global perspective. For this purpose, panel data of 87 developed and 60 developing countries have been used for the period 2000- 2020. The Panel Quantile Regression (PQR) estimation technique has been used for the analysis. The results demonstrate that sustainable FD significantly increases the competitiveness of all countries. However, this impact is non-linear across different quantile groups which suggests evidence of an inverted U-shaped relationship. The linearized marginal effect indicates that all developed economies lie before the maturity of the inverted U-shaped curve. In contrast, except Bolivia, Cabo Verde, Egypt, India, Indonesia, Korea Rep of, Lebanon, Mongolia, Morocco, Nigeria, Pakistan, Philippines, Siri Lanka, Tunisia, and Vietnam, all remaining developing nations also lie before the maturity of an inverted U-shaped curve. This indicates that FD accelerates global competitiveness up to a certain optimal point, and excessive financialization may lead to the misallocation of resources and raising financial risk. The study suggests that developing countries need to implement policies to attain optimal level of sustainable FD, which boosts their competitiveness. The major contribution of the present study is to help the policy makers to formulate proper policies to increase global competitiveness.