How to develop the capital market?: make countries fitness

This paper examines the relationship between the competitiveness of a country’s productive system and the development of its capital markets. Competitiveness
is measured using the Economic Fitness Index (EFI), which assess a country’s ability to produce diversified and complex goods. Analyzing panel data from 98 countries (1997–2022), the study finds a significant positive relationship between productive complexity and capital market development, even when controlling for macroeconomic stability, institutional quality, and banking development. The findings suggest that productive complexity enhances the demand for and supply of financial instruments, fostering deeper capital markets. Robustness checks using the Economic Complexity Index (ECI) confirm these results, underscoring the role of economic sophistication in financial market development.

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JEL Classification: C12, C14, G14, G15

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Keywords: Capital Market Development, Economic Fitness Index (EFI), Economic
Complexity Index (ECI).

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