International Financial Integration*

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important driver of international financial integration.¹⁴ All of these variables are in the set
Z_it and are included in the specification in first differences.

For a subset of fourteen countries, we also explore the role played by corporate tax
policies, by including in the regression a measure of the average effective corporate
income tax rate (TAXRATE).¹⁵ A favorable tax regime may stimulate FDI flows and also
encourage financial transactions between host and parent companies: this variable is also
first differenced. Finally, we also include a dummy variable for the introduction of insider
trading laws (PROTECTION).¹⁶ The insider-trading variable, which is entered in levels,
can proxy for the extent and quality of regulation of the domestic financial system.

Finally, we have also explored (but do not report) the impact of some other potential
determinants, such as country size and telecommunications infrastructure: the former was
always insignificant and did not alter the other results; the latter data are available for only
a small number of countries.

C. Results

Table 2 shows the results in explaining ∆IFIGDP for a range of specifications. In column
(1), we just include the EXTLIB variable: it is positive and significant but explains only a
small fraction of the variation in gross asset trade. Once we include other regressors,
EXTLIB no longer has independent explanatory power.

¹⁴ If a privatized state firm is floated on the domestic stock market, it will be picked up by
the STKCAP variable. However, private sales to foreign investors would not be captured in
that index.

¹⁵ This variable is constructed by Devereux, Lockwood, and Redoano (2002) and
Devereux, Griffith and Klemm (2002).

¹⁶ This dummy variable is developed by Bhattacharya and Douak (2000) and Bekeart et al
(2001).

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