Investigating the Relationship Between Country Competitiveness and Financial Market Development in Times of Crisis

Abstract

A country’s competitiveness depends on many factors related to general governance, effectiveness of markets, social development, and business perspectives. The role of financial markets for economic growth has been the subject of many scientific studies; most of them concluded that a well-developed financial system should improve the efficiency of financing decisions, favouring a better allocation of resources and thereby economic growth. The financial crisis that started in the summer of 2007 is still testing the strength of the global economic system. It started in the financial sector, but is now having an important impact on the real economy. The aim of this paper is to investigate the relationship between a country’s financial market development and its competitiveness in particular in times of crisis, with the use of a series of econometric models. We find evidence that financial market development is affected (with the anticipated sign of impact) by the Global Competitiveness Index, the GDP per capita and the (un)employment level of a country. It is also related (with an unexpected direction of impact) with the foreign market size and exports, as well as infrastructure. Our findings can be used by the policymakers of countries which wish to improve their competitiveness so as to steer the determining variables in the desired directions and approach their desired competitiveness levels.