Applicability of Openness-led Growth Hypothesis in Sri Lanka: An ARDL Bounds Test

Abstract

An openness-led growth hypothesis investigates the causal relationship between trade openness1 and economic growth. Indeed, trade openness can stimulate economic growth by enhancing the international flow of knowledge and innovation and by allowing economies of specialization, not only in the production of goods, but also in the generation of new knowledge and new inputs into production. The purpose of this article is to empirically examine an openness-led growth hypothesis, using the case of Sri Lanka for the period from 1965 to 2012. The article uses the recently developed autoregressive distributed lag (ARDL) bounds test for cointegration developed by Pesaran et al. (2001). The empirical results confirm the validity of the openness-led growth hypothesis for Sri Lanka.