Document Type : Original Article
Authors
1
Associate Professor, Department of Economical Sciences, Faculty of Economics and Management, Urmia University
2
Ph.D. Candidate, Department of Economical Sciences, Faculty of Economics and Management, Urmia University
10.22075/jem.2026.39728.2057
Abstract
This study examines the effect of financial development on industrialization across 64 developing countries from 1995 to 2021. The variables include industrialization (IND), financial development (FD), foreign direct investment (FI), economic growth (GR), and trade openness (TO). Data for IND, FI, GR, and TO were obtained from the World Bank's WDI database, while the FD index was sourced from the IMF's Financial Development Index Database. Industrialization, as a key development strategy, plays a vital role in enhancing productivity, technology transfer, and achieving the Sustainable Development Goals (SDGs). However, many developing countries face challenges such as inefficient financial systems and weak foreign investment attraction.
The Panel ARDL model with the PMG estimator was employed for short- and long-run analysis. Westerlund cointegration tests confirmed a stable long-run relationship among the variables. Empirical results showed that in the long run, financial development and trade openness have a negative and significant effect on industrialization, reflecting the inefficiency of bank-based financial systems that channel resources toward unproductive activities. In contrast, FDI has a positive and significant impact, contributing to industrial growth through technology transfer and productivity gains. Economic growth also exerts a positive and significant effect, indicating a reciprocal link between growth and industrial development. In the short run, most variables were insignificant, suggesting that industrialization is a gradual process.
From a policy perspective, the findings highlight the need for financial system reform by directing credits to productive activities, attracting FDI with technology transfer, supporting industry-led growth, and developing economic infrastructure. These results can guide policymakers in developing countries toward sustainable industrialization
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