Capital account liberalization and the margins of trade

Abstract How does capital account liberalization influence firms’ participation in international trade? This study investigates its effects on both the extensive and intensive margins of trade using a large firm-level dataset spanning 2006–2023 and covering 169 countries and employs IV-Probit and IV-2SLS models to address endogeneity concerns. The analysis reveals that capital account liberalization significantly increases the likelihood of firms engaging in export activities, particularly among foreign-owned firms. It also boosts export volumes for firms reliant on external financing. These findings suggest that liberalizing capital accounts can reduce financing frictions from initial investment and operational costs, expand export capacity, and stimulate trade-driven economic development. The findings imply that harmonized reforms in financial openness and trade policy may be critical for promoting inclusive growth in emerging and developing economies.