Testing for Trade-Induced Investment-Led Growth

34 Pages Posted: 29 Jun 2000 Last revised: 26 Oct 2022

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Elena Seghezza

Universite de Geneve

Date Written: January 1996

Abstract

Many studies have found a positive correlation between trade and growth, but do not attempt to identify the economic mechanisms involved. This paper attempts to identify one of the mechanisms linking trade and growth. In particular, we present a novel theoretical model that establishes a link between trade liberalization and investment-led growth. Estimating equations are derived from the model and estimated with three stage least squares on a cross-country data sample. We find that domestic protection depresses investment and thereby slows growth. Foreign trade barriers also lower domestic investment, but the anti-investment effect is weaker and is less robust to sample and specification changes.

Suggested Citation

Baldwin, Richard E. and Seghezza, Elena, Testing for Trade-Induced Investment-Led Growth (January 1996). NBER Working Paper No. w5416, Available at SSRN: https://ssrn.com/abstract=225476

Richard E. Baldwin (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Elena Seghezza

Universite de Geneve

PO Box 136
Geneva, CH-1211
Switzerland