Stock Market Liberalizations and Export Dynamics

Abstract

The paper shows that foreign investors facilitate a beneficial structural change in the recipient countries. We compute alignment of individual products with the comparative advantage of exporting countries and combine these data with stock market liberalization dates and a new measure of liberalization intensity at the industry-country level. Our difference-in-differences estimations suggest that opening the domestic stock market to foreign investors leads to termination of exports not corresponding to the comparative advantage of the liberalizing country. As their export portfolios move closer to their comparative advantage, the overall export performance of the liberalizing countries also improves. Domestic stock market development does not have the same structural impact. Additional evidence links these results to the superior monitoring skills of foreign investors.

Keywords: financial liberalization and structural change, disciplining role of foreign investors, export dynamics

JEL Classification: G15, G34, F65, F11