Helpless Rich Data: The Effect of Financial Openness with Dimensionality Reduction

H. E. Cha (), Doo Kyun Wang and Sherryl Berg-Ridenour
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H. E. Cha: Fred Hale School of Business, East Texas Baptist University, One Tiger Drive, Marshall, TX 75670, USA
Doo Kyun Wang: Department of Social Science, Korean Minjok Leadership Academy, 800 Bonghwa-ro, Anheung-myeon, Hoengseong-gun 25268, Gangwon-do, Republic of Korea
Sherryl Berg-Ridenour: Fred Hale School of Business, East Texas Baptist University, One Tiger Drive, Marshall, TX 75670, USA

Economies, 2025, vol. 13, issue 3, 1-23

Abstract: The literature on financial openness is rich, yet the selection of a suitable financial index remains a challenge. In this paper, Principal Component Analysis (PCA) and Factor Analysis (FA) are utilized to reduce the dimensionality of five publicly available financial openness indices. The results of the estimation are unexpected: PCA suggests a negative impact of financial openness on economic growth, while FA yields inconsistent results. Importantly, the negative impact of the institutional component on economic growth is statistically significant. These findings highlight the urgent need for proper institutional readiness to fully realize the benefits of financial openness.

Keywords: financial openness; economic development; principal component analysis; factor analysis (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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