Drivers of trade openness, exchange rates, and production efficiency: firm and country level study.

Shahida, Suleman (2024) Drivers of trade openness, exchange rates, and production efficiency: firm and country level study. Doctoral thesis, Sunway University.

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Abstract

This research focuses on the factors influencing trade openness and their flow-through effect on the production efficiency of both firms and countries. It further explores how enhanced production efficiency can lead to increased financial inflows into a country and examines the resultant impact on the nation's currency exchange rates. This thesis aims to bridge the existing knowledge gaps in the field of trade openness by conducting a comprehensive analysis across several pivotal areas. Firstly, it investigates the relationship between trade openness and associated factors. Secondly, it explores the impact of trade openness on improving production efficiency at the firm level. Thirdly, the study examines the flow through effects of trade openness on countries' productivity. Lastly, it assesses how enhanced production efficiency influences trade flows, subsequently leading to financial inflows that have a bearing on currency exchange rates. Data from the World Trade Organization (WTO) was collected for the period spanning 1995 to 2020, covering 101 nations categorized into three groups based on their levels of trade openness (high, moderate, and low). Additionally, a sample of 600 manufacturing companies from economies with high and low trade openness was included for the period between 2010 and 2019. The study employed several statistical methods, such as stepwise regression, ordinary least squares (OLS), fixed/random effect methods, and fully modified least squares (FMOLS) to estimate the results. The Granger Causality test was also utilized to determine the direction of causality. Regarding the first objective, the findings reveal a positive relationship between trade openness drivers and level of trade openness. The study specifically identifies gross national savings, trade reserves, per capita income, net flows of foreign direct investment and exchange rate as significant factors driving trade openness. In contrast, per capita income is recognized as having the most considerable influence on trade openness. The findings related to the second objective suggest that firms in economies with high trade openness witness a more significant positive effect on their total factor productivity, primarily due to improvements in efficiency and technology, in comparison to firms in economies with lower levels of trade openness. Furthermore, the analysis reveals a unidirectional relationship between technological changes and total factor productivity. In relation to the third objective, the research findings demonstrate that the growth in total factor productivity for 20 countries engaged in open trading is at 10 percent. When comparing the two distinct groups, the study reveals that the average total factor productivity in ten countries with a high level of trade openness stands at 16 percent, a figure that is threefold higher than in ten countries characterized by lower trade openness. The results related to the fourth objective reveal that trade reserves have a significantly negative effect on exchange rates across the full spectrum and in three distinct categories of trade openness. It is particularly noteworthy that economies with low trade openness display the most substantial influence of trade reserves on their exchange rates, whereas economies with high and moderate trade openness exhibit a lesser impact.

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