Response of Manufacturing Sector to Financial Liberalization in Pakistan

Abstract

It has been believed that financial liberalization can stimulate industrial growth which may be translated into overall growth of the economy by efficient allocation of credit which generates investment opportunities by reducing the cost of investment, deregulations, privatizations and reduced capital controls. This paper aims to examine the impact of financial liberalization on industrial response in manufacturing industry measured as new firm entry. Moreover, moderating effect of external finance dependence on the relationship of financial liberalization and firm entry is estimated. We estimate the model using Generalized methods of moments and found that external finance dependence has a significant negative impact of new firm entry, while financial liberalization has a positive but insignificant impact on firm entry. Nevertheless, a statistically significant positive moderating impact of external finance dependence is documented which implies that the sectors which are more dependent on external finance gain disproportionate benefit from financial liberalization.