Financial Inclusion, Globalization and Structural Transformation in Developing Countries: A Finite Mixture-of-Regressions Approach

Abstract

Industrialization plays a key role in job creation and economic development. We extend the abundant literature on the determinants of industrialization by exploring the potential effects of financial inclusion in 64 developing countries over the period 2000-2020. Using a finite mixture regression model, we find that our sample is best described by a model with three classes of countries. We then incorporate the potential presence of hidden heterogeneity and, we explain the class membership of countries based on globalization. We find that the impact of financial inclusion on industrialization differs across these three classes of countries. Specifically, financial inclusion is negatively associated with industrialization in the first class of countries where the level of industrialization is low, while it positively affects industrialization in relatively more industrialized countries (class 2 and class 3). We also show that better-integrated countries into the global economy are more likely to be in the class where financial inclusion promotes industrialization. Our results are robust to several robustness checks. Our findings suggest that developing countries could reap more benefits from financial inclusion by strengthening their integration into the global economy.