Impact of Openness on Economic Growth in Developing Economies: An Empirical Analysis

Abstract

A country’s openness has been one of the primary driving forces for stimulating growth. Among researchers, it is still controversial to conclude openness-growth relationship. It might be the result of ignoring the mediation effect of some conditional variables. Although some papers have found that openness has a positive impact on economic growth, others have seriously questioned the significance of this finding. The objective of this study is to empirically explore openness-growth relationship using fixed capital stock as a mediator variable in a panel data set of 19 developing economies spanning 1980 to 2013. The study examines the relationship between trade openness and economic growth. The results outline that the direct impact of trade openness on economic growth is negative, while it tends to exert a positive effect on economic growth when fixed capital formation is taken as a mediating variable and show a threshold. The findings of the study may help policy-makers in selected developing countries to take advantage of increasing international trade by considering domestic development level of fixed capital formation.