Banking Sector Openness and Economic Growth

Banking sector openness may directly increase growth by improving the quality of financial services and increasing funds available, or indirectly by improving the efficiency of financial intermediaries, both of which may reduce the cost of financing, in turn, increase capital accumulation and economic growth. The objective of this paper is to empirically reinvestigate these direct and indirect links, using a more advanced econometric technique (generalised method-of-moments [GMM] dynamic panel estimators). An illustrative model is presented to link financial market development with investment. The empirical results support the presence of direct and indirect links, thus encouraging countries planning to open their financial markets.