Factors driving financial development in top and bottom globalized developing economies: Does economic globalization matter?

The "globalization-led financial development" hypothesis of Mishkin (2009) postulates that globalization through the channel of institutional quality can improve financial development in developing economies. In this context, our study is motivated to examine the effects of economic globalization and institutional quality on financial development in top and bottom globalized developing countries using the panel data of 1984-2016. We consider a sample of 15 European and Central Asian and 4 South Asian countries as top and bottom globalized developing regions. Economic growth, government investment and inflation are also included as a set of control variables in financial development function. The battery of panel cointegration tests (Pedroni, 2004; Westerlund, 2007) is utilized, indicating the presence of long-run association between the series. The findings from using Pesaran's et al. (2001) panel Autoregressive Distributed Lag (ARDL) model indicate that economic globalization and institutional quality promote financial development in both the developing regions but the effect of economic globalization on financial development is higher in top globalized developing region than the bottom globalized developing region. Economic globalization also enhances financial market and impedes the development of financial institutions in top globalized developing region, while it performs the opposite in bottom globalized developing region. We find the varying effects of government investment and inflation on financial development, while economic growth enhances it in heterogeneous developing regions. These results are robust across alternative panel techniques. Our findings suggest that economic globalization is an instrument for the policymakers to improve developing countries' financial development in the long-run.