Impact of Financial Development and Trade Liberalization on Total Factor Productivity: Evidence from Export and Non-Export Firms of Pakistan

Abstract

This paper examines the impact of financial development, trade liberalization and corporate tax on Total Factor Productivity (TFP) of the export and non-export industrial firms listed over the Pakistan Stock Exchange. The analysis used data for the post liberalization period from 1997 to 2017 using System Generalized Method of Moments (Sys-GMM).

We used three proxies for financial development to analyze their impact on TFP. The Financial Development Index and Financial Institution Depth Index that capture multidimension effect had significant positive impact on TFP of both the export and non-export firms, however, the impact is stronger in case of exporting firms.

Besides, trade liberalization proxied by average tariff rate, customs duty and sales tax, the results are statistically significant. The reduction in average tariff rate exerted positive impact on TFP for exporting firms while negative for non-export firms. The impact of customs duty is insignificant. Reduction in sales tax exerted positive impact on TFP of export-firms while negative for non-export firms. Reduction in corporate tax asserted significant positive influence on TFP growth of exporting and non-exporting firms, however, the impact is greater for export-firms.

Keywords:

Financial Development, Trade Liberalization, Total Factor Productivity, Corporate Tax, Export and Non-Export Firms