The effect of capital flows and financial external dependence on international trade: An analysis of selected countries

Global economies are forced to exert increasing efforts every day to achieve their economic growth and development goals and to close the gap between expectations and actual outcomes. One of the most significant obstacles facing global economies in these efforts is the scarcity of capital. Therefore, from the perspective of developed and developing countries, this scarcity of capital raises the issue of financial dependency. Furthermore, a discrepancy in trade balances in debt-financed industries has been observed between countries with and without a developed financial system. Literature studies have identified a limited number of studies on the combined impact of these three components on international foreign trade, including capital flows, trade openness, and financial dependency, and a relatively limited number of empirical studies, including those involving emerging economies and Turkey. Investigating the macro-level impact of international capital flows and financial dependency on foreign trade, considering the variables used in this study and the selected countries, will contribute to the literature as an original and significant contribution. This study, inspired by Rajan and Zingales' 1996 study "Financial Dependence and Growth," aims to determine the impact of capital flows and countries' levels of financial dependency on foreign trade balances. It also aims to analyze the relationship between variables such as financial dependency, trade balance, and trade openness of country groups and international trade from a macro perspective, using panel data analysis for 13 emerging economy countries, including Turkey, for the period 1990-2023. 8 Raghuram G. Rajan and Luigi Zingales' article "Financial Dependence and Growth" (43 countries and 36 sectors / Panel Data Analysis) concluded that sectors dependent on external financing would experience relatively higher growth rates in countries with more developed financial markets. They concluded that financial development positively impacts the pace of sectoral development and, consequently, economic growth, and that firms (or sectors) dependent on external financing are more developed in these economies. Our study analyzed 13 countries classified as emerging economies using selected indicators consisting of a total of six variables and annual data from the World Bank for the period 1990-2023. The emerging economies included in the analysis are Argentina, Brazil, China, Indonesia, the Philippines, South Africa, India, Colombia, Mexico, Egypt, Russia, Thailand, and Turkey, respectively. In the panel data analysis conducted for 13 countries, the dependent variable (Import + Export) / GDP (Trade (percentage of GDP)) was used as an indicator of trade openness. The dependent variables in our analysis were Exchange Rate (EER), External Debt (DBORC), Foreign Direct Investment (FDI), Portfolio Investment (PY), and Total Reserves (REZ) and were used as indicators representing financial dependence. The variables used in the analysis were obtained from the World Bank website (https://databank.worldbank.org). Consequently, it was determined that the real effective exchange rate index, external debt stock, and portfolio investments have a statistically significant and negative effect on openness in the long run, while foreign direct investment and total reserves have a statistically significant and positive effect on openness in the long run. The real effective exchange rate index and external debt stock were found to significantly reduce the openness ratio in the short run. Furthermore, the estimation results indicated that the independent variables explained 77% of the dependent variable, indicating that the model In addition to determining that the explanatory power is high, the model was found to be generally significant. KEYWORDS: Trade Openness, Financial Dependence, Capital Movements, Westerlund Cointegration Test, Globalization.