(School of Economics, Hangzhou Dianzi University)
Abstract: Based on Levchenko’s theory of Asset Specificity, this paper analyzes the micro mechanism that financial development works on the comparative advantage in sophisticated products. The sophisticated products are made of various heterogeneous intermediates. As the incomplete trading contract, investment in heterogeneous intermediates faces the holdup problem and will be insufficient, that will be alleviated by the scattered investment risk for the financial development. The production scale of the sophisticated products will be enlarged and countries with advanced financial market will have the comparative advantage in sophisticated products. The empirical test with transnational data confirmed our theory. The development in Finance expedites the upgrading of industries by promoting the investment in heterogeneous intermediates, and incurs more comparative benefit.
Key Words: Financial Development; Heterogeneous Intermediates; Transaction Cost; Asset Specificity; Export Sophistication