Assessing the Role of Financial Development in Economic Sophistication: Evidence from a Dynamic Threshold Approach

Muhammad Asim Imam; Sajjad Ahmad; Maher Azzam AlQadi; Farah Essa Dudin; Ameer Reaad Alhzeem; Bilal Jamal Rimawi; Murad Mohammed Mujahed; Laith Wael Mohammad Shrouf; Mahmoud Abdelrehim

doi:10.63332/joph.v5i5.1708

Authors

Muhammad Asim Imam Ph.D. Scholar: School of Business and Economics, Universiti Putra Malaysia
Sajjad Ahmad Assistant Professor, School of Business & Management Sciences, Minhaj University, Lahore, Pakistan.
Maher Azzam AlQadi Department of Accounting, School of Business, Al al-Bayt University, Mafraq, Jordan
Farah Essa Dudin Department of Computerized Banking and Financial Science، Palestine Technical University –Kadoorie, Ramallah, Palestine
Ameer Reaad Alhzeem Department of Accounting, School of Business, Al al-Bayt University, Mafraq, Jordan
Bilal Jamal Rimawi Department of Accounting and Auditing, Palestine Technical University –Kadoorie, Ramallah, Palestine
Murad Mohammed Mujahed Ph.D. Scholar Putra Business School, University Putra Malaysia
Laith Wael Mohammad Shrouf Department of Accounting and Audit, Palestine Technical University, Hebron, Palestine
Mahmoud Abdelrehim School of Business and Economics, University Putra Malaysia

DOI:

https://doi.org/10.63332/joph.v5i5.1708

Keywords:

Economic Sophistication, Financial Development, Private Credit Sector, Threshold, GMM

Abstract

This study examines the non-linear relationship between financial development and economic sophistication across 71 developing economies from 1995 to 2019. Using a dynamic panel threshold model, it investigates how varying levels of financial development affect economic sophistication—a metric reflecting a nation’s production capacity and export of advanced goods. The findings reveal a threshold effect: financial development enhances economic sophistication only when it remains below a certain level. Beyond this threshold, further financial development diminishes economic sophistication. Across various indicators of financial development, including stock market turnover, domestic credit, private sector credit, and stock value traded, these results hold. The study shows the importance of balanced financial growth importance, which cautions that excessive financial system expansion causes inefficiency and counterproductive results. Policy recommendations encourage the developing world to prioritise the enhancement of the financial intermediation quality rather than only increasing the financial sector. More research should study the effect of equity markets and test the everlasting consequences of financial progress on the progress of economic complexities.