Financial Deepening, Global Exposure, and Economic Performance in Non-OECD Developed Economies: Evidence from Dynamic Common Correlated Effects Estimation

Abstract

This study investigates the dynamic relationships among financial development, globalization, foreign direct investment (FDI), investment rates, and economic performance in 27 non-OECD developed economies over the period 1995–2024. Anchored on the endogenous growth framework, the study employs panel econometric techniques including pooled ordinary least squares (POLS), fixed effects (FE), Pesaran Cross-sectional Dependence (CD) tests, and the Dynamic Common Correlated Effects (DCCE) estimator to account for heterogeneity and cross-sectional dependence. Descriptive statistics indicate relatively high levels of globalization and financial development across the sampled economies, while the Pesaran CD results confirm significant cross-sectional dependence among all variables at the 1% significance level. The POLS results reveal that investment rate, financial development, and globalization positively and significantly influence GDP per capita, whereas FDI exhibits a negative short-run effect. Under the fixed effects model, human capital and investment rate maintain significant positive effects on growth. However, the DCCE estimation shows that investment rate remains positively significant, while financial development exerts a weak negative effect after accounting for dynamic heterogeneity and common global shocks. The lagged GDP per capita coefficient (1.0115) further confirms strong growth persistence across countries. Sensitivity analysis demonstrates that the estimated relationships remain stable after excluding crisis periods, indicating robustness of the findings. The study concludes that financial deepening, productive investment, and globalization remain important determinants of economic performance, although their effects depend significantly on institutional quality, macroeconomic stability, and the capacity of economies to absorb external shocks. The study recommends stronger financial sector regulation, investment-friendly policies, institutional strengthening, and coordinated macroeconomic frameworks to sustain long-run growth in non-OECD developed economies.