Effect of financial integration on total factor productivity: innovation with spillover

The spillover effects of financial integration have remained an unresolved issue for decades. Empirical tests employing micro datasets tend to obtain robust and significant evidence, whereas tests with macro datasets cannot obtain significant regressors. This study suggests that the advantage of backwardness is a necessary condition for the spillover effect and addresses the core empirical issue of the applicability of macro datasets. By developing a theoretical framework and embedding it into a simulated generalized method of moments estimation, robust evidence is obtained using a macro cross-country panel dataset. The results indicate that financial integration, together with the advantage of backwardness, can foster significant innovation and identify the spillover effects of financial integration.