# **5. RESULTS**

# **5.1. TRADE SPECIALIZATION**

First, we examine the outcomes when only financial sector development, proxied by the private credit to GDP ratio, is considered. The association between financial sector development with both sector-level external finance dependence (������ ) and asset tangibility (��� ) are included in the regression. The interaction terms with these two sector-specific requirements capture different mechanisms. The interaction term with ������ captures how industries highly reliant on external financing benefit more from financial sector development since financing from sources outside the firm becomes less costly relative to the firm’s own funds. The interaction term with ��� reflects the agency problem and the preference towards lending to firms that have tangible (i.e,. physical) assets to offer as collateral.

Table 3 display estimates for equation (2) using the share of exports per sector as the dependent variable. Results for trade specialization are shown using data from both the BACI and the EDD. The BACI data contains many more MENA countries than the EDD data set. Results in columns (1) and (3) yield similar results to Beck (2003), a significant correlation is found between sectorlevel external finance dependence and a country’s financial sector development. The interpretation being that for a sector with a given level of external finance dependence, the share of exports from that sector is higher in countries where the financial sector is more developed. This result holds irrespective of the export data source, though the effect is much smaller using BACI data than the EDD, possibly reflecting the different country and temporal coverage of the data sets. Results from columns (2) and (4) are also consistent with Hur, Raj, and Riyanto’s (2006) study, which examines both sector level external finance dependence and asset tangibility.

The summary statistics in Table 3 (lower section) shows that sector-level dependencies and private credit to GDP ratios between the MENA and non-MENA country groups are similar using either the BACI or the EDD data. Non-MENA export sectors are more dependent on external finance and have lower shares of tangible assets compared with MENA export sectors. The private credit to GDP ratio is also higher in non-MENA countries, highlighting their higher levels of financial sector development in those countries.

If MENA countries were to have similar levels of financial sector development as the rest of the world, we would expect MENA’s exports to reflect greater specialization in sectors more dependent on external finance and more intangible assets, a point worth noting since these sectors tend to have higher value-added.

Next, we examine results of the regression incorporating both country-level financial sector development and governance indicators. Table 4 presents results when financial sector development is proxied by the private credit to GDP ratio, and various governance proxies. The dependent variable is the share of exports by sector. Comparative advantages from a sector’s external finance dependence are naturally best linked with financial sector development. Asset tangibility is related to liquidity, contracts, and ownership, and more related to legal and governance factors. This specification is most similar to Hur, Raj, and Riyanto’s study (HRR, 2006).

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