from sectors comprised of more intangible assets<sup>6</sup> are higher when countries have stronger property rights (Claessens and Laeven, 2003; Hur, Raj, and Riyanto, 2006). These studies have utilized data with limited coverage of countries from the MENA region: Hur, Raj, and Riyanto’s (2006) study of finance and trade across 42 countries includes only one MENA country (Syria). Svaleryd and Vlachos (2005) examine only OECD countries and do not include any MENA countries. While Beck’s (2003) study of financial dependence and international trade does include five MENA countries (out of 56 countries total), it does not examine the aspect of asset tangibility.

This paper combines aspects of the analysis focused on external financing as a determinant of export performance (Beck, 2003; Rajan and Zingales, 2001) and aspects of the literature focused on sector asset tangibility and governance (Braun, 2003), to assess the role of financial sector development and governance on export performance and specialization. Inclusion of more MENA countries in the analysis allows for MENA-specific characteristics to be discussed.

Improving the understanding of what stimulates and inhibits exports in MENA is vital, as a number of empirical studies have shown that this region exports below its potential.<sup>7</sup> Twenty-two percent of MENA firms report that customs and trade regulation are a major constraint to business operations (Figure 1, Enterprise Surveys<sup>8</sup> ). Yet, the potential for trade is great. The region is strategically located, nested between European, African, and Asian markets. MENA is also endowed with human capital, experiencing a growing base of educated youth looking for work. In terms of the business climate, the Global Competitiveness Index ranks the MENA region better than upper-middle-income countries in the areas of infrastructure, health, primary education, and higher education.

The literature finds that the presence of trade agreements between MENA countries and the rest of the world does not stimulate trade. On the other hand, domestic reforms are effective in stimulating trade by inducing a supply response from improved governance, regulations, openness, and labor markets (Freund, Portugal-Perez, 2013). The significance of institutional quality<sup>9</sup> towards promoting trade has also been documented by Francois and Manchin (2007) and Anderson and Marcoullier (2002).

As regards financial sector development, MENA exhibits low levels of financial inclusion. Only 27.1 percent of MENA firms have a loan or line of credit, compared to 43 and 47 percent in the Eastern Europe and Central Asia and Latin America and Caribbean regions, respectively.

> 6 Intangible assets are assets with lower ability to be transferred between signatories to a contract (e.g. from borrower to creditor) when the terms of the contract are broken. Examples of intangible assets are goodwill, R&D, associated human capital, organizational capital and even accounts receivables, cash, inventory or related investments. Examples of tangible assets, those amenable for use as collateral, are real estate, machinery, industry plants. “The higher the proportion of tangible assets a firm or entrepreneur has the higher the effective protection the outside investor has, and the more likely the relationship will be stable and become feasible in the first place” Braun, 2003.

> 7 See Behar and Freund (2011), Bhattacharya and Wolde (2010), and Iqbal and Nabli (2007).

> 8 The World Bank’s Enterprise Surveys is a firm-level survey, conducted in over 110 economies, that provides useful insights on firm perceptions and experiences. It is important to note that most of the MENA Enterprise Surveys do not have weights, and the survey statistics cannot be extrapolated to be representative at the country or sector level. The exceptions are Iraq 2011 and Yemen 2010 surveys, which do follow the Enterprise Surveys Global sampling methodology. Note also that the surveys in the MENA region were conducted in different years.

> 9 Institutional quality factors include weighted components of the size of government, legal system property rights, sound money, freedom to trade internationally, and regulation.

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