Discussion Paper Details

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Title: Testing for Trade-induced Investment-led Growth

Author(s): Richard Baldwin and Elena Seghezza

Publication Date: February 1996

Keyword(s): lnvestment-led Growth and Trade and Growth

Programme Area(s): International Trade and Regional Economics

Abstract: Many studies have found a positive correlation between trade and growth, but do not attempt to identify the economic mechanisms involved. This paper attempts to identify one of the mechanisms linking trade and growth. In particular, we present a novel theoretical model that establishes a link between trade liberalization and investment-led growth. Estimating equations are derived from the model and estimated with three-stage least squares on a cross-country data sample. We find that domestic protection depresses investment and thereby slows growth. Foreign trade barriers also lower domestic investment, but the anti-investment effect is weaker and is less robust to sample and specification changes.

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Bibliographic Reference

Baldwin, R and Seghezza, E. 1996. 'Testing for Trade-induced Investment-led Growth'. London, Centre for Economic Policy Research.