The positive growth effect of financial liberalization in the form of equity market openness or capital account openness has been well documented in the literature. In this paper, I will go further to investigate if the growth effect may be heterogeneous across countries at different stages of institutional development, such as the degrees of corruption, bureaucracy, and law and order. The results obtained suggest that after controlling for other determinants of growth, the positive growth effect of equity market openness disappeared after considering institutional effect. However, when considering the interaction between equity market openness and institutional factor, the result shows that an open equity market positively affects growth only after a country has achieved a certain degree of institutional development, and this institutional effect is especially important for less developed countries. This provides support to the view that there is an optimal sequencing for equity market liberalization.
