Causal Nexus Between Innovation, Financial Development, and Economic Growth: the Case of OECD Countries

Abstract

The literature on the relationship between innovation, financial development, and economic growth has attracted growing interest in recent years; however, some authors have investigated this relationship using mainly Granger causality test and focusing specially on European countries. This paper examines the causal relationship between innovation, financial development, and economic growth using panel VAR approach for 27 OECD countries over the period 2001–2016. This methodology has allowed us to analyze the three-way linkages between innovation, financial development, and economic growth. Most importantly, the findings revealed that there is a unidirectional causality from economic growth to financial development. The neutrality hypothesis is confirmed from financial development to economic growth as well as between innovation and economic growth and between financial development and innovation. The paper concludes that further regulation of financial systems and the quality of funding are important ingredients to foster economic development. The paper also concludes that the relationship between innovation and economic growth is complex and country-specific characteristics can play an important role in fostering innovation and productivity. Finally, the paper concludes that governments can play an important role in developing a legislative framework favoring the development of innovation financing through the patent guarantee deposit.