Banking Regulations and Country’s Innovative Development: the Mediating Role of Financial Development

Muslum Mursalov

doi:10.21272/mmi.2020.4-13

Abstract

Promoting innovation requires efficient financial regulations ensuring well-functioning financial markets that play critical roles in reducing financing costs, allocating scarce resources, evaluating innovative projects, and managing risks. The author indicated that rigorous empirical studies that link financial regulation and innovation development are sparse. Thus, this study aims to provide some empirical evidence on linking government interventions, particularly by banking regulations and supervision, and a country’s innovative growth from the perspective of the mediating role of financial development. Specifically, this paper demonstrates that the development of financial markets and financial institutions mediates the path between financial regulation and innovation development in Azerbaijan. The structural equation modeling technique using the statistical package PATH additionally to confirmatory factor analysis in STATISTICA was applied to analyze the data. Contrary to expectations, this study did not find a significant direct impact of changes in regulatory benchmarks related to total CAR and FX loans to total loans on Azerbaijan’s rank in the Global Innovation Index and the volumes of high-technology exports. One of the more significant findings to emerge from this study is that the government regulatory and supervisory interventions in the banking sphere are changing the imprudent financial institutions’ and markets’ behavior. Thereby it contributes to establishing a better developed and sound financial system in terms of their access, depth, and efficiency. Meanwhile, financial institutions’ and markets’ development contributes to the country’s innovative development. This combination of findings provides some support for the conceptual premise that reduction or elimination of government power in the financial markets and institutions leads to exacerbating systemic risk and destabilization of the financial system that could not build extensive innovation capacities to foster growth. Keywords: banking regulation and supervision, Global Innovation Index (GII), high-technology exports, financial institutions development, financial markets development.

Highlights

There is a growing body of literature that recognizes the importance of innovations in achieving robust, inclusive, and sustainable economic growth (Wang et al, 2013; Sineviciene et al, 2018; Lyeonov et al, 2019; Lazarov and Petreski, 2019)
Theoretical model consists of two latent constructs and six observed variables, confirmatory factor analysis for coefficients estimations, confirmation of latent constructs validity, and fit were applied using the STATISTICA program
It is conducted that any changes in regulatory benchmarks related to total CAR and FX loans to total loans have no significant direct impact on the rank of Azerbaijan in the Global Innovation Index as well as the volumes of high-technology exports

Summary

Introduction

There is a growing body of literature that recognizes the importance of innovations in achieving robust, inclusive, and sustainable economic growth (Wang et al, 2013; Sineviciene et al, 2018; Lyeonov et al, 2019; Lazarov and Petreski, 2019). In line with Schumpeter (1911), a considerable amount of empirical research has confirmed the relationships between banking and financial markets development and fostering innovation (Ang, 2011; Hsu et al, 2014; Dovha and Boychenko, 201; Xin, 2019). Development of both financial market and institution creates fertile grounds for expanding research and development (R&D, R+D) activities that companies or governments undertake creating new technology, products, services, or systems, and speeding up innovation growth in the country (King et al, 1993; Loayza and Ranciere, 2004). Many studies highlighted that government intervention, among other things through banking regulations and supervision, ensures cross-national differences in financial development (Lee and Lu, 2015; Barth et al, 2018; Islam and Khan,2019)

Objectives

Methods

Results

Conclusion