Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries

49 Pages Posted: 20 Apr 2005

See all articles by Arturo José Galindo

Arturo José Galindo

Inter-American Development Bank

Fabio Schiantarelli

Boston College - Department of Economics; IZA Institute of Labor Economics

Andrew Weiss

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

Has financial liberalization improved the efficiency with which investment funds are allocated to competing uses? In this paper, we address this question using firm level panel data from twelve developing countries. We develop a summary index of the efficiency of investment allocation that measures whether, and to which extent, investment funds are going to firms with a higher marginal return to capital. We then examine the relationship between this index and various measures of financial liberalization. The results suggest that financial reform tends to lead to an increase in the efficiency with which investment funds are allocated. This conclusion holds after a series of robustness checks and is consistent with firm level evidence we present suggesting that the association between investment and fundamentals has become stronger with financial liberalization.

Keywords: Financial liberalization, investment, efficiency

JEL Classification: E22, E44, G28, O16

Suggested Citation

Galindo, Arturo José and Schiantarelli, Fabio and Weiss, Andrew M., Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries (March 2005). Available at SSRN: https://ssrn.com/abstract=698345 or http://dx.doi.org/10.2139/ssrn.698345

Arturo José Galindo (Contact Author)

Inter-American Development Bank ( email )

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Fabio Schiantarelli

Boston College - Department of Economics ( email )

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HOME PAGE: http://https://sites.google.com/a/bc.edu/fabio-schiantarelli/

IZA Institute of Labor Economics

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Andrew M. Weiss

Boston University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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