TRADE LIBERALIZATION AND REAL SECTOR INVESTMENT DECISIONS:

NEW PANEL DATA EVIDENCE

Abstract

Trade liberalization has a dynamic role in overall economic growth. Any change in trade can

change the efficiency of almost all sectors of an economy. Among the others, this study attempts

to investigate the role of trade openness in determining real sector investment decisions. For

empirical analysis, we consider ten years of data of non-financial sector firms from 11 Asian

economies and employ the system GMM model to examine the regression among variables. The

statistical results first imply that both accumulated trade openness and import orientation have a

statistically significant but inverse relationship with real sector investment decisions.

Nonetheless, the export orientation demonstrates the positive significant link with industrial

investment. Focusing on export orientation can leverage the industrial investment. The empirical

findings suggest important trade-related instructions for Asian economies. Such economies

should not follow trade liberalization specifically import orientation because it hampers the

growth of the industrial sector. However, Asian economies can expedite the industrial growth

regarding new investment by focusing on export orientations. Overall, this study illustrates that

trade orientation of a country has a significant contribution in shaping corporate investment

decisions. It explores distinct implications of trade orientations in real sector investment

decisions.

Keywords: Asian Economies; Capital Investment; Export Orientation; Import Orientation; Trade

Openness

JEL Codes: F10, F14, G31

1. Introduction

During the past few decades, trade-growth nexus has been debated extensively across the

academic community and in economic literature (Tahir & Azid, 2015). It is explicitly evident

from empirical findings of previous studies arranged on similar theme that trade openness

positively contributes to economic growth (Hye & Lau, 2015; Tahir, et al., 2018; Raghutla,

2020). The findings of these studies specified channels through which trade openness can

accelerate the economic growth such as transfer of technology across the borders, economies of

scale regarding production, formulation of capital, and access of traders to foreign markets

having better prices for their products. Irrespective of such beneficial outputs, some studies have

criticized the trade openness because it can hamper economic growth (Ulaşan, 2015). Trade

openness deemed to create economic complexities including tough competition regarding

product quality and quantity for local industrial sector. Thus, such inconclusive literature

findings suggest exploring further studies that examine linkages between trade openness and

performance of other economic sectors. It is evident from literature that trade liberalization has

an impact on real sector i.e., industrial sector growth (Chandran & Munusamy, 2009). The

growth of industrial sector strategically links with industrial investment i.e., investment to widen

their production operations. Following these notions, the focus of current study is to explore the

nexuses between trade openness and its relevant impacts on real sector investment decisions.

The liberalization of trade can uplift the economic growth of a country, based on resource

endowments and comparative advantages of such liberalization (Rahman, et al., 2017). A

country facing a declining trend regarding economic growth can get advantages by following

specific trade orientation which can expedite its economic growth. The developing economies

are trying their best to reduce the current account deficit stemming from high population growth,
low product quality, lack of industrial technology innovation, and poor governance situations by

extensive focus on its industrial sector growth (Hassan, et al., 2017). In this regard, such

economies are trying to articulate such trade policies that meet the objective. The impact of

foreign trade orientation on local industrial sector depends upon sensitivity and capacity of

industrial sector to respond to such orientations. Whereby trade liberalization boosts the

economic growth due to free access to international market, it can impede the growth of

domestic industrial sector through unfavored competition between foreign and local products,

preference of consumers to foreign products over local products, increment in supply of products

that deemed to be low demand and thus low prices (Umer & Alam, 2013). Such factors

eventually reduce the growth of local industrial sector. Therefore, developing economies need to

adopt the suitable trade orientations that do not hamper the growth rate of domestic industrial

sector.

The nexus between trade openness and economic growth has been extensively debated in

literature (Brueckner & Lederman, 2015; Salahuddin & Gow, 2016; Bourdon, et al., 2018). Most

studies have stated that trade openness accelerates the economic growth. But it is still unexplored

in literature what are the possible consequences of trade liberalization for domestic sector

specifically how it determines the investment decisions of industrial sector. The connectiveness

between trade openness and industrial sector growth can be understood through the channel of

export and import orientation of a country. If a country is export oriented, it can obtain benefit

from trade openness because such orientation allows its industrial sector to access the foreign

market for selling its products. It further facilitates the industrial sector of a country to achieve

the economies of scale through production at larger level. The objective of voluminous

production is directly connected with more investment in proliferation and acquisition of three
production factors i.e., property, plant, and equipment (PPE hereafter) collectively known as

capital investment (Farooq, et al., 2021). However, the import orientation of a country can create

multiple economic complexities. Among others, it can demolish industrial sector growth by

tough competition regarding product quality, giving way to more trade deficit and

unemployment due to the destruction of industrial sector which absorbs the sufficient labor

force. Thus, it is necessary to devise such trade orientations that ensure the industrial growth.

This study intends to find out the empirical relationship between trade openness and real sector

investment decisions. For regression analysis, we considered non-financial sector firms from 11

Asian economies and apply the system GMM model. The statistical outputs of this model imply

that accumulated trade openness has a negative and significant impact on real sector investment.

This negative influence was found stable across import orientation and alternative estimation

technique (generalized linear model). The trade liberalization generates tough competition for

domestic industrial sector which deteriorates the investment of this sector. However, the

statistical analysis demonstrates the positive and significant influence of export orientation on

industrial sector investment. The findings of the current study argue the sensitivity of industrial

sector investment decisions regarding trade liberalization. This study further extends the existing

literature by exploring the empirical nexus between trade openness and investment decisions of

industrial sector. It is equally important to investigate the impact of trade orientation on the real

sector investment which is key respondent of such trade orientations.

This study contributes in the following way: first, it enriches existing literature by exploring the

empirical nexus between trade orientation and corporate investment. It extends the empirical

analysis conducted by Li, et al., (2018) by adding the export orientation and accumulated trade

openness. They have only studied the penetration of import orientation into industrial sector
investment for U.S. financial market. However, current analysis provides robustness regarding

import orientation in alternative data specification and adds new thoughts regarding the influence

of export orientation on investment decisions in alternative data set. Second, we empirically

demonstrate that Asian economies should not follow the trade liberalization and specifically

import orientation because such orientation causes the negative effect on real sector investment.

Most studies focused on trade-economic growth nexus; however, the consequences of such

policies for the real sector and specifically for investment decisions have been extensively

overlooked. Thus, this study is innovative by providing comprehensive impact on all trade

orientations including accumulated trade orientation, export orientation and import orientation

on real sector investment decisions.

The paper is structured as follow: Section 2 presents the literature review and hypotheses

development, section 3 explains the data and methodology details employed to achieve the

objective, and section 4 describes the empirical results. In section 5, we discuss comprehensively

the main regression results. Section 6 concludes the whole discussion of the paper and reference

details are given at the end of the paper.

2. Literature Review

This study contributes to mainstream literature on international trade and financial economics by

adding the relevant impacts of trade openness on real sector investment decisions. Meanwhile,

most studies suggested the positive influence of trade openness on economic growth (Keho,

2017; Makun, 2017; Raghutla, 2020). The empirical findings of these studies argued that trade

openness can facilitate the transformation of modern technology across borders, enhance

bilateral and multilateral cooperation among countries and diminish the other trade barriers

including tariffs. Such favorable trade policies can uplift the overall economic prosperity. These
theoretical notions were also supported by Neoclassical Theory of trade; suggesting that trade

openness permits the efficient allocation of resources and more capital formulation, eventually

leading to instant economic growth (Helpman & Krugman, 1985). Likewise, new growth theory

argued the positive supremacy of trade openness by shedding the light on favorable impacts

regarding technology sharing and utilization of factors of production (Romer, 1986). Conversely,

a study conceived by Ulaşan (2015) holds the views that trade openness can slow down the

economic growth by transformation of international competition regarding product quality into

domestic industrial environment. The unrestricted flow of industrial goods across the nations can

mitigate the domestic industrial growth by creating tough competition. Such deterioration of

industrial growth is more obvious in developing economies producing low-quality goods due to

lack of modern technology (Melo & Solleder, 2020).

Empirically, a recent study conducted by Saleem, et al., (2020) has concluded the positive

influence of trade openness and FDI on economic growth in Asian economies. Hossain and

Maitra (2020) documented the positive impact of monetary policy and trade openness on the

economic growth of India. Brueckner and Lederman (2015) argued the simultaneity between

trade openness and economic growth. Their study documented the negative impact of economic

growth on trade openness while trade liberalization positively related to economic growth. They

documented that 1% increase in trade to GDP ratio uplifted the economic growth by 0.5% in

short run. Later, Makun (2017) provided the robustness to such literature direction by exploring

the Malaysian market. He also conjectured the positive nexus between trade openness and

economic growth. In spite of the excessive literature on the nexus between trade openness and

economic growth, we found no study to explore the underlying relationship between trade
openness and real sector investment decisions. Thus, current analysis attempts to fill this instant

gap in the literature.

Trade Openness and Investment

The impact of trade openness on the industrial sector development is not unanimous in

literature.

Some studies found the positive influence of trade openness on industrial growth (Umer &

Alam, 2013; Goldar, et al., 2020) while others contradicted the existence of this influence

(Chen, et al., 2017; Shu & Steinwender, 2019) specifically in emerging economies facing low

technological development. The opponents of the favourable impacts of trade openness on

industrial growth vowed that trade liberalization spurs industrial growth by imparting product

competitiveness. It could result in an influx of unfavourable foreign competition into the local

market which could further diminish the output of domestic industrial sector. According to the

Ricardian model (Ricardo, 1817), gains from trade liberalization of a specific country depend

upon comparative advantages from openness to trade and its responsiveness capacity to such

policies. As developing economies have low development of industrial technology (Pietrobelli

& Rabellotti, 2011), trade openness can bring product disparities that hamper domestic

industrial growth. In this regard, Magacho et al., (2018) vowed the negative influence of trade

openness on local industrial development. Omoke and Charles (2021) asserted that openness to

trade deteriorated the institutional quality which further decreased industrial growth.

Irrespective of such literature findings, no specific study was found to explore the relationship

between trade openness and real sector investment. However, some studies indirectly guided

towards a proposed relationship such as Umer and Alam (2013) proposed the negative

relationship between trade liberalization and industrial growth. Industrial growth can be termed
as an industrial investment. Similarly, Shu and Steinwender (2019) found the negative influence

of trade openness on productivity and innovation activities of corporate firms in developing

economies. Khobai and Moyo (2021) suggested that trade openness negatively related to

domestic industrial performance due to product competitiveness and increment in imports. Low

industrial performance directly determined the declining investment behaviour. Thus, it can be

suggested that,

H1: Trade openness has a negative and statistically significant impact on domestic real sector

investment decisions.

Export Orientation and Investment

It is substantial to widen the export volume to sustain the economic growth and development of

other economic sectors. A country having extensive export volume can mitigate unemployment

through absorption of labour by industrial sector (Feenstra, et al., 2019), and can expediate its

economic growth (Keho, 2017). Additionally, export orientation has spillover effects on

industrial expansion and production system (Buturac, et al., 2019). An empirical study

conducted by Osakwe, et al., (2018) indicated that trade liberalization in terms of export

diversification tended to enhance the export volume of developing economies which eventually

led to more industrial growth. More specifically, Cheung (2010) found the positive spillover

effects of exports on industrial innovation activities. He made the analysis on the Chinese

market and vowed that export expansion regarding industrial products accompanied the better

innovation performance. Westphal (2002) articulated that those technological developments of

Taiwanese firms were driven by foreign market access to the selling of the products. Yang and

Chen (2012) highlighted the growth factor of Indonesian firms that was interaction with foreign

customers. Similarly, Caldera (2010) documented that increment in export volume enabled the
Spanish firms to leverage their innovation activities. Recently, Li, et al., (2022) added that

access to foreign markets can enhance the firm level innovation in China.

Irrespective of abundant literature on positive impacts of export on industrial sector

development, no specific study was found to explore the linkages between export orientation

and real sector investment. However, this relationship can be developed by linking the demand

increments of industrial products due to high export volume to voluminous production of such

products by industrial sector. Such an increase in production argues to enhance the acquisition

of capital assets i.e., property, plant, and equipment collectively known as capital investment

(Chaudhuri, et al., 2010). By learning from empirical findings of these studies, it can be

suggested that.

H2: Export orientation has a positive and statistically significant impact on corporate

investment decisions.

Import Orientation and Investment

Since the last decade, the exogenous impacts of tariff reduction have been identified on

domestic product market competition. An array of studies has suggested the causal penetration

of imports on dividend payout policy (Zhou, et al., 2013), financing decision (Xu, 2012), cash

holding (Hoberg, et al., 2014), and cost of debt (Valta, 2012). The empirical findings of these

studies explicitly described the divergent impacts of import orientation on multiple decisions of

industrial sector. The inflow of foreign industrial goods exaggerates the product competition

into domestic product market and hurdled the local firms to achieve maximum sale volume. In

this regard, a recent study conducted by Li, et al., (2018) has examined the joint influence of

imports and FDI on capital investment decisions of domestic firms. They have analysed the U.S.

market and suggested the negative relationship between imports and capital investment
decisions. The increased import volume impedes the sale volume and thus low cash-inflow from

capital investment which substantially discouraged the corporate managers to invest more in

acquisition of fixed assets. However, their study intended to explore the U.S. market while

current analysis considers the Asian market which may have different business model.

Likewise, another study carried out by Frésard and Valta (2016) conjectured the negative trends

in capital investment decisions in response of tariffs reductions. This notion was later supported

by Wang (2017). He vowed that inflow of foreign capital negatively impinged upon investment

decisions of domestic firms by hampering the cash-inflow volume. The intensive inflow of

foreign products restricted the domestic firms to achieve the economies of scale in its

production due to lower sale and thus led to higher production cost. In such situation, corporate

firms suffered from low profit, less capital reserve and less availability of funds to invest in

capital projects (Farooq, et al., 2021). Following the literature findings, it can be hypothesized

that.

H3: There exists significant and negative relationship between import orientation and corporate

investment decisions.

3. Material and Methods

The aim of the current study is to explore the empirical linkages between trade orientation and

industrial sector investment. To achieve the aim, we employ the ten years of data (2010-2019)

of non-financial publicly listed firms from 11 Asian economies (detail in Table 1). We select

this span due to the significant increase in the international trade volume of underlying

economies during this period (Tang & Abosedra, 2019). Moreover, it is the recent data before

the spread of COVID and therefore it is more appropriate to select this span. Similarly, the

motivation for the selection of underlying countries is that all economies are situated within the
Asia region and have strong trade connections. The trade orientation of one country may

overlap with others and can significantly influence the investment arrangements. Therefore, it is

interesting to explore the underlying objective of the study by sampling these economies. We

considered the non-financial sector firms as the objective was to check the impact of trade

openness on real-sector investment decisions, not the financial sector. Furthermore, the financial

sector does not produce any physical products and it is unrelated to export or import. Therefore,

we exclude the financial sector firms carrying SIC code 6000-6999. We exclude the firms

missing financial information for any specific variable for five or more than five years and make

the data more transparent by winsorizing at 5% from both ends. After applying such tools, 6647

firms were selected for final analysis. The financial information on firm-specific variables was

obtained from Thomson Reuters DataStream and numerical information on macroeconomic

variables was derived from WDI (World Development Indicator), The World Bank. Data

availability statement comprises as2

Equation (1) shows the general econometric model that is to be tested in this study. In this

equation, Yijt is an acronym for dependent variable and Xijt is the representation of independent

variable. FCV shows the firm-specific control variables while MCV is for macroeconomic

control variables. The subscripts i shows the cross-section, j country, and t is for time. Similarly,

β is constant showing the slope of regression line. The econometric equation (2) exemplifies the

relationship between INV (investment) and other variables of the study including TTO (total
 trade openness), FS (firm size), LVG (leverage), IFR (inflation rate), IR (interest rate), GDP

(gross domestic product growth rate), and FDI (foreign direct investment). The brief estimation

detail of these variables was provided in Table 2. Similarly, equation (3) mainly shows the

relationship between INV and EXP (export orientation) and equation (4) describes the

relationship between INV and IMP (import orientation). Both equations consist of control

variables.

Table 1. List of Selected Countries

Sr. no. Country Name No. of selected firms
1 China 1,503
2 India 1,154
3 Indonesia 138
4 Japan 1,961
5 Malaysia 366
6 Pakistan 112
7 Philippines 55
8 Singapore 171
9 South Korea 821

Sr. no. Country Name No. of selected firms

10 Thailand 256
11 Turkey 110
Total 6,647

Note: The strength of companies listed in Table 1 are the non-financial firms Source: stock

exchanges, central banks, and also the financial sheets published by specific companies.

Table 2 presents the description of the variables of the study. It shows the relevant role,

measurement, and reference detail of relative study from which calculation was extracted.
 Table 2. Variables of Study

Sr. No. Variables Role Measurement Reference

1 Corporate DV Capital expenditures for acquisition ( Yang, et al., 2017;
Investment Li, of property plant and equipment et al., 2020; Farooq,
et
(purchase of fixed assets/total al., 2021) assets)
2 Trade IV Exports/total GDP (Chandran
Openness Imports/total GDP Munusamy, 2009
Liargovas &
Total trade/total GDP Skandalis, 2012 Hye
& Lau, 2015;
Bourdon, et al., 2018;
Raghutla, 2020)
3 Firm Size FCV Log of total assets (Ajide, 2017)
4 Leverage FCV Total debt/total assets (Ajide, 2017)
5 Profitability FCV EBIT/total assets (Ajide, 2017)
6 Inflation Rate MCV CPI (consumer price index) (Farooq, et al., 2021)
7 Interest Rate MCV Lending interest rate (Farooq, et al., 2021)
8 GDP growth MCV Percentage increment in total GDP (Farooq, et al., 2021)
rate
9 FDI MCV Net FDI inflow (Farooq, et al., 2021)

Acronyms: DV= dependent variable, IV= independent variable, FCV= firm-specific control variables, MCV= macroeconomic
control variables Source: Previous studies carried out on the same theme
4. Methodology

To test the empirical relationship between the variables of study, we first employ the panel fixed

effect model (results of this model hidden) to estimates the predicted research models. However,

due to the presence of a set of macroeconomic variables that are likely to be endogenous with

error term and probability of improper measurements of variables, the regression estimation

through this model can give biased regression results due to the presence of endogeneity issue.

To empirically test this issue, we employ the Wald test and report the analysis in Table 4. The

significant p-value of chi-square (shown in Table 4) confirms the existence of the endogeneity

issue. In addition, it is necessary to check the stationarity of series specifically when analysis

contains several macroeconomic variables. For this purpose, we run the unit root testing and

present the results in Table 3. The probability value of ADF test accepts the alternative

hypothesis i.e., data are stationarity at normal. Following these econometric predictions, we

finalize the two step system GMM model (shortly abbreviated as system GMM) to check the

regression. This model was firstly developed by Arellano and Bond (1991) to deal with the

problem of endogeneity in panel data estimation.

The GMM estimation is preferable as it does not require any additional instrument to resolve the

problem of endogeneity. Additionally, this technique considers the first difference or lagged

levels of all explanatory variables as instruments that can further eliminate the country biasness

by fixing the cross-sections. It reduces the omission of country-specific determinants of

investment decisions and thus low chances of presence of endogeneity result (Arellano &

Bover, 1995). Furthermore, dynamic GMM is not persistent when there is less variance in data

across t (time). Therefore, we employ the system GMM model which tends to provide unbiased

regression estimation. To validate the instruments that were employed in GMM estimation, we
consider the Hansen J-test (known as J-statistics) and report the results at the bottom of the main

regression Tables 8, 9, & 10. The null hypothesis for this model states that “instruments are

valid”. As statistics shows, the insignificant value of J-statistics results in acceptance of null

hypothesis i.e., selected instruments are valid. The robustness was performed by employing the

GLM (generalized linear model) model.

Table 3. Panel Unit Root Test

Unit root Testing
ADF - Fisher Chi-sq uare Im, Pesaran and Shin W-stat
Variable Name Statistic Prob. Statistic Prob.
INV 10325.700 0.000*** 103.700 0.000***
EXP 18259.000 0.000*** -134.886 0.000***
IMP 12693.000 0.000*** -76.325 0.000***
TTO 16373.400 0.000*** -114.406 0.000***
FS 14692.300 0.000*** -36.138 0.000***
LVG 9462.120 0.000*** -65.322 0.000***
ROA 11640.800 0.000*** -82.746 0.000***
IFR 22212.100 0.000*** -63.139 0.000***
IR 18758.700 0.000*** -78.039 0.000***
GDP 34042.300 0.000*** -84.661 0.000***
FDI 97900.621 0.000 -114.889 0.000***
Source: Author’s own calculation
Table 4. Wald Test
Test Statistic Value Df Probability
Panel estimation
F-statistic 285.672 (10.397180 0.000***
Chi-square 2856.726 10 0.000***
Individual estimation
Coefficient Restriction Probability Std. Error
C (1) 0.431 0.014
C (2) 0.008*** 0.073

Test Statistic Value Df Probability

C (3) -0.013*** 0.071
C (4) 0.020*** 0.072
C (5) -0.031*** 0.002
C (6) 0.097* 0.004
C (7) -0.092* 0.006
C (8) 0.002*** 0.003
C (9) -0.003*** 0.002
C (10) -0.004*** 0.002
Note: *=significant at 10% level, **=significant at 5% level, ***=significant at 1% level, Description: The significant p-
value of coefficients restrictions indicates the coherence of explanatory variables with error term which create the issue
of endogeneity.

5. Empirical Results

This section presents the statistical outcomes of the study in the form of descriptive statistics,

correlation analysis, and regression analysis.

Descriptive Statistics

In this part, we have described the descriptive statistics.

Table 5. Overall Descriptive Statistics

Mean Median Std. Deviation Maximum Minimum
INV 0.390 0.361 0.001 0.901 0.010
EXP 0.331 0.124 0.042 2.391 0.086
IMP 0.318 0.219 0.103 2.192 0.113
TTO 0.601 0.415 0.052 4.172 0.222
FS 2.214 2.189 0.076 5.677 0.012
LVG 0.233 0.221 0.123 0.909 0.010
ROA 0.053 0.054 0.071 0.901 -0.081
IFR 4.154 4.318 0.049 20.286 -0.352
IR 3.192 3.231 0.311 11.782 -0.079
GDP 4.741 4.912 0.059 14.525 -5.416
FDI 11.218 11.335 0.055 11.463 8.059
Source: Own calculation, Abbreviation: INV= capital investment, EXP= export orientation, IMP= import orientation, TTO=

net trade openness, FS=firm size, LVG=leverage, ROA=profitability, IFR=inflation rate, IR= interest rate, GDP= growth

rate, FDI= foreign direct investment.

Table 5 shows the descriptive analysis in the form of mean, median, and standard deviation etc.

As shown in the table, the mean value of INV is 0.390. This value exemplifies the trend of

corporate firms regarding investment in acquisition of fixed assets. As for concern trade

openness, percentage of EXP (exports) to total GDP is 33.1% and percentage of imports is

31.8%. While total trade volume is 63.3%. These values provide information on basic trade

activities of the analysed countries. More specifically, this trend can be comprehended from

Table 6 which provides the information on individual statistics of all countries. According to
 statistics shown in Table 6, the maximum export volume is 1.960 for Singapore while its

average import volume is 1.707 which is also the highest number as compared to other

countries. If we are to analyse, the average investment volume in Singapore is 34.5% which is

lowest value. This value clearly supports the notion that a country that is more open to trade

(3.668) must bear less real sector investment (0.345). Similarly, other countries carry the

specific mean values (shown in Table 6) regarding the variables of study. These values provide

comprehensive information on country-wise trends.

Table 6: Country Wise Trend

INV EXP IMP TTO FS LVG ROA IFR IR GDP FDI
China 0.259 0.374 0.220 0.480 2.570 0.305 0.056 2.934 2.020 9.004 11.328
India 0.416 0.222 0.268 0.490 2.521 0.348 0.082 8.383 4.053 6.776 10.525
Indonesia 0.414 0.231 0.215 0.447 2.289 0.308 0.097 5.848 4.557 5.558 10.104
Japan 0.348 0.161 0.164 0.326 2.693 0.241 0.046 0.282 1.779 0.492 10.008
Malysia 0.383 0.835 0.698 1.533 1.914 0.237 0.058 2.395 2.450 4.782 9.826
Pakistan 0.503 0.132 0.218 0.351 1.948 0.348 0.109 9.818 2.735 3.655 9.321
Philippines 0.358 1.459 1.297 2.756 2.341 0.232 0.060 2.745 3.936 5.235 10.317
Singapore 0.345 1.960 1.707 3.668 2.334 0.220 0.051 2.430 4.005 5.081 10.667
S. Korea 0.379 0.477 0.439 0.916 2.342 0.281 0.042 2.337 3.074 3.342 9.966
Thailand 0.437 0.681 0.623 1.305 2.196 0.299 0.076 2.030 2.607 3.222 9.864
Turkey 0.393 0.228 0.269 0.497 2.478 0.276 0.082 8.117 2.842 4.848 10.156
Source: Own calculation, Abbreviation: INV= capital investment, EXP= export orientation, IMP= import orientation, TTO=
net trade openness, FS=firm size, LVG=leverage, ROA=profitability, IFR=inflation rate, IR= interest rate, GDP= growth
rate, FDI= foreign direct investment.

Figure 1 indicates the co-movement of main variables of study. Additionally, this figure

provides robustness regarding main findings of the study i.e., trade decreases, investment of

domestic industrial sector increases1.

1 As we can see, when trade lines are moving downward, the line of investment is flowing upward. This opposite
movements of variables suggest the negative relationship.
 Figure 1: Co-Movement of Main Variables of Study
0.9
0.8
0.7
0.6
Score
0.5
0.4
0.3
0.2
0.1
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Year

investment export orientation

import orientation total trade openness

Correlation Analysis

This subsection provides the information about correlation analysis.

Table 7: Correlation Analysis

INV EXP IMP TTO FS LVG ROA IFR IR GDP FDI
INV 1.000
EXP 0.004 1.000
IMP -0.016 0.988 1.000
TTO -0.010 0.997 0.996 1.000
FS -0.059 -0.108 -0.134 -0.120 1.000
LVG 0.325 -0.049 -0.034 -0.042 0.009 1.000
ROA -0.054 -0.011 0.006 -0.002 0.084 -0.227 1.000
IFR 0.124 -0.037 0.055 0.004 -0.283 0.187 0.187 1.000
IR 0.042 0.050 0.078 0.063 -0.097 0.061 0.001 -0.038 1.000
GDP 0.061 0.074 0.060 0.068 -0.137 0.135 0.113 0.439 0.013 1.000
FDI -0.004 -0.080 -0.112 -0.095 0.040 0.090 0.016 0.171 -0.056 0.581 1.000
Source: Own calculation, Abbreviation: INV= capital investment, EXP= export orientation, IMP= import orientation, TTO=
net trade openness, FS=firm size, LVG=leverage, ROA=profitability, IFR=inflation rate, IR= interest rate, GDP= growth
rate, FDI= foreign direct investment.

Table 7 explains the correlation matrix among the variables of study. The correlation trends of

EXP, IMP, and TTO are parallel with the notions of developed hypotheses i.e., export

orientation boosts the investment while import and trade liberalization lead to impeding the real
sector investment. The lowest correlation values can be explained by the indifferent nature of

variables

i.e., investment is firm-specific variable while trade orientations are non-firm specific variables.

Importantly, as shown in column 3 of Table 7, proxies of trade openness have the highest

correlation values i.e., 0.988 for IMP while 0.997 for TTO. Thus, it can create the biasness if we

include all proxies in a single econometric equation for regression estimation. Therefore, we

develop separate econometric models and report the results in Tables 8, 9, & 10.

Regression Analysis

This part presents the regression analysis between explained and explanatory variables of study.

Table 8. Effect of Trade Openness on Industrial Sector Investment

Statistical Outputs of GMM (Estimation of equation 2)

Variable Name Coefficient Std. Error Prob.
C 0.529*** 0.109 0.000
INV (-1) 0.339*** 0.121 0.000
TTO (total trade openness) -0.213*** 0.011 0.000
Firm specific control variables
FS (firm size) 0.193*** 0.006 0.000
LVG (leverage) 0.241*** 0.012 0.000
ROA (profitability) -0.510*** 0.152 0.000
Macroeconomic control variables
IFR (inflation rate) -0.012*** 0.001 0.000
IR (interest rate) -0.008*** 0.002 0.000
GDP (GDP growth rate) 0.019*** 0.013 0.000
FDI (foreign direct investment) -0.008*** 0.004 0.000
Adjusted R-squared 0.629
S.E. of regression 0.015
AR (1) 0.002
AR (2) 0.198
Prob. J-statistics 0.191
Source: Author’s own calculation. Description: *=significant at 10% level, **=significant at 5% level, ***=significant at 1%
level Instruments Specification: INV (-1) TTO (-1) FS (-1) LVG (-1) ROA (-1) IFR (-1) IR (-1) GDP (-1) FDI (-1).

Table 8 presents the regressions outputs for econometric equation 2. As shown in table, TTO

(trade openness) has a negative and significant coefficient value -0.213. Trade openness is

significant at 1% level, showing that a one-unit shift in TTO could lead to 21.3% variation in
investment volume while keeping other variables constant. This value further specifies the

acceptance of alternative hypothesis (H1). As for the concerned firm-specific control variables,

FS and LVG have positive and significant coefficients’ values 0.193 and 0.241 relatively while

ROA has negative and significant coefficient value -0.510. At macro-level, IFR, IR, and FDI

have negative and significant coefficient values while GDP has positive and significant

coefficient value. Their coefficient values are -0.012, -0.008, -0.008, and 0.019 relatively.

Table 9: Effect of Export Orientation on Investment Decision

Statistical Outputs of GMM ((Estimation of equation 3)

Variable Name Coefficient Std. Error Prob.
C 1.124*** 0.103 0.000
INV (-1) 0.781*** 0.133 0.000
EXP (export orientation) 0.233*** 0.011 0.000
Firm specific control variables
FS (firm size) 0.123** 0.004 0.000
LVG (leverage) 0.145*** 0.012 0.000
ROA (profitability) -0.604*** 0.041 0.000
Macroeconomic control variables
IFR (inflation rate) -0.006*** 0.002 0.000
IR (interest rate) -0.023*** 0.010 0.000
GDP (GDP growth rate) 0.018*** 0.002 0.000
FDI (foreign direct investment) -0.084*** 0.014 0.000
Adjusted R-squared 0.683
S.E. of regression 0.041
AR (1) 0.007
AR (2) 0.212
Prob. J-statistics 0.128
Source: Author’s own calculation. Description: *=signif icant at 10% level, **=significant at 5% level, ***=significant at 1%
level Instruments Specification: INV (-1) EXP (-1) FS (-1) LVG (-1) ROA (-1) IFR (-1) IR (-1) GDP (-1) FDI (-1).

In Table 9, we provided the regression outputs for econometric equation 3. As statistics show,

EXP has a positive and significant coefficient value 0.233. Contrary to total trade openness, this

value shows the significant and positive influence of export orientation on real sector

investment, explaining that from one-unit change in EXP results 23.3% variation in real sector

investment. Other variables of study have similar regression trends as explained in Table 8.
Table 10. Effect of Import Orientation on Investment Decision

Statistical Outputs of GMM ((Estimation of equation 4)

Variable Name Coefficient Std. Error Prob.

C 1.131*** 0.161 0.000
INV (-1) 0.888*** 0.212 0.000
IMP (import orientation) -1.313*** 0.091 0.000
Firm specific control variables
FS (firm size) 0.021*** 0.008 0.001
LVG (leverage) 0.221*** 0.011 0.000
ROA (profitability) -0.575*** 0.062 0.000
Macroeconomic control variables
IFR (inflation rate) -0.130*** 0.004 0.000

Statistical Outputs of GMM ((Estimation of equation 4)

Variable Name Coefficient Std. Error Prob.
IR (interest rate) -0.031*** 0.002 0.000
GDP (GDP growth rate) 0.012*** 0.002 0.000
FDI (foreign direct investment) -0.161*** 0.019 0.000
Adjusted R-squared 0.671
S.E. of regression 0.081
AR (1) 0.000
AR (2) 0.415
Prob. J-statistics 0.161
Source: Author’s own calculation. Description: *=significant at 10% level, **=significant at 5% level,
***=significant at 1% level Instruments Specification: INV (-1) IMO (-1) FS (-1) LVG (-1) ROA (-1) IFR (-1) IR (-1) GDP (-1)
FDI (-1).

Table 10 provides the statistical information on regression analysis for econometric equation 4.

It can be observed that import orientation has a negative and significant coefficient value -1.313.

This negative effect is stronger as compared to TTO and EXP. It can be suggested that import

orientation can severely deteriorate the investment of real sector of sampled countries. This

negative value further implies the acceptance of third alternative hypothesis (H3). Additionally,

the regression trends of other control variables are still consistent as mentioned in Tables 8, 9, &

10. We check the robustness by employing the GLM (generalized linear model) and report the

analysis in Table A1.

6. Discussion

This study sets out to explore the transformation channel of trade liberalization into real sector

investment. Additionally, the current analysis deemed to quantify the penetration of export and

import orientations into corporate-level decisions i.e., investment decisions. For this purpose,

we apply the system GMM model and report the results in Tables 8, 9, & 10. As the statistics

show, trade openness has a significant and negative influence on corporate investment

decisions. This adverse influence can be explained through the channel of increase competition

which hampers the growth of domestic industrial sector specifically in emerging economies

lacking technological innovation. Trade liberalization intensifies the threat of competition due to

presence of foreign products on the domestic market (Chen, et al., 2017). Developing

economies are unable to get the advantages from trade liberalization because the industrial

products of such economies are not compatible with the products of developed countries to beat

the latter on the international market. In this regard, Magacho et al., (2018) explicitly found the

adverse effects of trade liberalization on industrial development of country. Later, Shu and

Steinwender (2019) also favoured the notions of negative influence of trade openness on

industrial growth reflected by industrial investment. The current analysis offers the robustness

to the empirical findings of their studies and complements the literature by extending the role of

trade openness in corporate investment.

However, export orientation has a positive and significant relationship with investment

decisions (As shown in Table 9). Focusing on export orientation, a country can allow its

industrial sector to boost its production volume which further results in achieving economies of

scale in production system (Buturac, et al., 2019). The export of industrial products allows the

enhancing of the sale volume which further enhances the profitability of enterprises. This factor
encourages the corporate managers to expand their industrial investment to meet the increasing

demand for their products. Following this, Osakwe, et al. (2018) argued that export orientation

significantly accelerates the industrial expansion and production capacity. Caldera (2010) also

highlighted the favourable impacts of export orientation on industrial innovation activities

achievable only through active investment in acquisition of PPE. This study extends the

literature by exploring role of export orientation in corporate investment decisions. However,

import orientation has a negative relationship with corporate investment. Li, et al., (2018)

explicitly defined the two channels i.e., sluggish cash-inflow and financing constraints through

which imports hamper the investment of domestic industrial sector. The transfer channel of

import orientation into investment decisions of enterprises can be comprehended as the entry of

foreign products into domestic market reduces the sale volume of domestic industrial sector

which further declines the cash-inflow on investment. Moreover, such decline in the sales

volume impedes profitability which eventually diminishes the capital reserve of enterprises for

any new investments. In such situation, industrial sector follows conservative investment

strategies. In brief, it can be stated that both trade openness and import orientation have negative

while export orientation has a positive relationship with corporate investment decisions. The

important lesson for policy officials from the current analysis is that they should not follow the

trade openness orientation as it has adverse impact on corporate investment. This study offers

the corporate-level penetration effect of trade-related orientations.

In addition to trade related policies, we also consider a set of control variables both at firm-level

and macroeconomic level to make the analysis more comprehensive. At firm level, firm size

carries the significant and positive coefficient value, showing the positive role of the firm size in

determining the capital investment. Larger firms are more optimistic in making capital
investments due to maximum utilization capacity and high return from such investments (Chen,

et al., 2017). Additionally, such firms have excessive demand for their products that require

more installation of PPE. Similarly, leverage has a positive and significant impact on corporate

investment decisions. The availability of bank loans provides the financial flexibility to make

the capital investment. Furthermore, corporate managers normally acquire bank loans when they

decide to start a new capital project. An empirical study conducted by Ajide (2017) supported

similar trends of firm size and leverage in determining corporate investment decisions.

However, as the statistics shows, ROA negatively and significantly related to firm investment

decisions. Contrary to common literature findings, this negative relationship can be understood

through the optimistic behavior of profitable firms. Such firms are interested in investing in

early-return projects which eventually limit the capital investment options. A recent study

carried out by Farooq, et al., (2021) explicitly documented a similar relationship.

At macroeconomic level, statistics illustrate that inflation rate and interest significantly but

negatively impinges upon corporate investment decisions. A high inflation rate tends to

depreciate the future cash flow of an investment. Similarly, a high interest rate creates an

opportunity cost to invest in physical project. Corporate managers are attracted to invest in

government securities offering high interest rate instead of physical investment (Yang, et al.,

2017). Thus, both factors negatively corroborate the investment decisions. However, as the

findings reveal, GDP growth rate has a positive influence on corporate investment decisions.

High GDP growth rate is an indication of overall economic prosperity which eventually leads to

more demand for industrial goods and more industrial investment (An, et al., 2016). Foreign

direct investment which is a country-level funds inflow carries a negative association with

investment decisions. An inflow of funds specifically for the purpose of establishing the
industrial units ultimately intensifies the competition and mitigates the growth of domestic

industrial sector. It generates considerable product competition which has negative spillover

effect on industrial investment (Ajide, 2017). The influence of macroeconomic variables is

consistent with empirical findings of past studies carried out by Li, et al., (2018) and Farooq, et

al., (2021).

Briefly, the statistical findings suggested the negative and significant influence of trade

liberalization and import orientation while a positive impact of export orientation on real sector

investment decisions. It further visualizes the dynamic impact of other control variables.

7.Conclusion

This study aims to identify the influence of trade liberalization on real sector investment

decisions and how rising volume of imports and exports changes these decisions. For this

purpose, we sampled the non-financial sector firms in Asian economies and applied system

GMM model for regression analysis. The statistical findings first imply that trade liberalization

and import orientation negatively and significantly influence real sector investment decisions.

However, such negativity can be diverted by focusing on export orientation. Additionally, this

study also highlights the dynamic influence of a set of control variables considered both at firm

level and country level on real sector investment decisions. Our empirical results provide better

insights regarding consequences of trade liberalization policies. The empirical analysis suggests

that in addition to other macroeconomic and routine determinants of corporate investment, trade

policies also matter for industrial growth. This study exhibits an interesting fact that

liberalization of trade and import volume can also mitigate the industrial investment volume by

escalating products competition. However, export orientation allows the industrial sector to
flourish. The statistical findings further imply the acceptance of all alternative hypotheses (H1,

H2, H3).

8.Policy Implications and Limitations

The following policy implications emerge from current analysis. The under-analysis countries

should not follow the trade liberalization orientation because it hampers the industrial sector

investment which is a key player of the economy. It is also suggested that such economies

should minimize their import orientation because it works as double edge swords i.e., trade

deficit and adverse effect on industrial sector regarding investment decisions. Policy officials

should focus more on export orientation instead of trade openness and import orientation

because such trade orientation can bring many positive outcomes in the form of positive

industrial investment and decline in trade deficit etc. Similarly, the important lesson for

corporate managers from the current analysis is that they should consider trade-related

orientation of the federal government while making investment decisions. In addition to firm-

level determinants e.g., firm size, leverage etc., corporate managers should consider the trade

orientation sensitivity of investment. Despite many policy yields, the limitation of the current

analysis is that it considers all economies in a single analysis while each economy may have

different market arrangements and therefore the magnitude of the effect of trade orientation on

investment may be deferent from others. Therefore, the policies yielded from the current

analysis cannot be generalized for other economies. Moreover, the effect of trade orientation on

investment across various industrial sectors was also ignored in the current analysis. Each sector

of an economy may respond differently to national trade pressure. Future studies can be

conducted by introducing the industry dummy and by considering the other important factors

e.g., an institutional quality that can potentially moderate this relationship.

Highlights

This study enriches the understanding on following points.

Trade openness negatively influence the real sector investment decisions.

Import orientation has negative impact on real sector investment decisions.

Export orientation has positive influence on real sector investment decisions.

Trade liberalization has a significant contribution in determining the capital investment

decisions of non-financial sector firms from Asian economies.

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Appendix

Table A1: Robustness Analysis

Trade openness Export Orientation Import Orientation
Coeff. Prob. Coeff. Prob. C oeff. Prob.
C 0.425*** 0.000 0.424*** 0.000 0.425*** 0.000
TTO -0.004*** 0.007
EXP 0.008*** 0.005
IMP -0.008*** 0.012
FS 0.009*** 0.000 0.009*** 0.000 0.009*** 0.000
LVG 0.336*** 0.000 0.336*** 0.000 0.336*** 0.000
ROA -0.024*** 0.025 0.024*** 0.025 -0.024*** 0.025
IFR -0.002*** 0.000 -0.002*** 0.000 -0.002*** 0.000
IR -0.001*** 0.000 -0.001*** 0.000 -0.001*** 0.000
GDP 0.006*** 0.037 0.005*** 0.044 0.006*** 0.029
FDI -0.013*** 0.000 -0.013*** 0.000 -0.013*** 0.000
Akaike info criterion -0.679 -0.676
(AIC) -0.679
Schwarz criterion (SIC) -0.678 -0.681 -0.625
Source: Author’s own calculation. Description: *=significant at 10% level, **=significant at 5% level, ***=significant at 1%
level. Abbreviations: EXP= export orientation, IMP= import orientation, TTO= net trade openness, FS=firm size,
LVG=leverage, ROA=profitability, IFR=inflation rate, IR= interest rate, GDP= growth rate, FDI= foreign direct investment.