The Effect Of Financial Development On Extensive Margin

The Heterogeneous Firm Model pushes the focus of international trade to a deeper degree, to analyze the essence of trade growth. The theory proved that trade growth consists of two sides, one is a simple increase in the trading quantity, and the other is a wider product range and more trading partners. The former one is called intensive margin of trade growth, while the latter is named extensive margin. Financial development will boost international trade, with great impacts on dual margin. The extensive margin is regarded as a symbol of trading competitiveness and trading welfare, which, therefore, receives more attention.In this paper, we reviewed the theory of financial development, combine its contribute onto relief firm’s credit constrain with the model of Chaney(2005) for a reanalysis, trying to summarize the role of financial development in international trade and the mechanism of its resulting impact on the margins. We also introduced the concept of intensive marginal and extensive margin. Then we described the features of current financial development worldwide and also the dual margin indifferent countries, which can directly reflect the status quo in the world. Finally, using data from 69 countries in the period duration from 1996 to 2012, we analyzed the relationship between financial development and the extensive margin. Furthermore, we explored the difference between the opposing effects using both the total sample and the sub-samples. In this paper, we took both financial scale and financial efficiency into consideration. Five indicators of financial development are used, including Financial Interrelations Ratio (FIR), size of private credit, market capitalization rate, stock traded, and interest rate spread. With collection, calculation and regression analysis of almost 70 million units of original data, we find that financial development does have a significant positive effect on the extensive margin. Moreover, the marginal effect of financial development is greater in developing countries than developed ones. The effect of financial development is not equal in different industries. For the high-tech industry that usually have a higher R&D intensity, or the industries having a higher dependence on external financing, this kind of effect is much more obvious than the others.China’s export is experiencing a high speed growth, but the low efficiency and vulnerable status causes more attention. The result is meaningful for China’s export policy and financial reform. On one hand, we should pay equal attention to both the intensive margin and extensive margin. On the other hand, we should continue to accelerate financial reform, giving full play to the role of financial support for the development of trade and strive for a stronger trading country continuously.