The Effects of Data Restriction Policies and Institutions on Digital Financial Service and Trade

Data have become an important factor of production, and their cross-border flows are critical to fostering technological innovation and consumer welfare in the digital-based economy, as well as the development of trade in digital services. On the other hand, many countries regulate cross-border data flows for national security and personal privacy. This study examines the effects of cross-border data restriction policies on digital financial services and trade in the presence of cross-country institutional quality variations. Toward that end, we re-measured the data restriction policy indexes of 60 economies between 2005 and 2018. Using the fixed effects model and the panel 2SLS method, evidence shows that strong data restriction policies significantly negatively affect digital financial services and international trade and that institutional quality attenuates this negative effect. These relationships also vary across six digital service industries and countries (developing vs. developed countries and smaller vs. larger trade countries). Our research provides a policy implication: institutional quality needs to be improved adequately in the face of the worldwide trend of strengthening data restriction policies.