Financial Development and Technology

Abstract

Research in development economics reveals that the bulk of cross-country differences in economic growth is attributable to differences in productivity. By some accounts, productivity contributes to more than 60 percent of countries' growth in per capita GDP. I examine a particular channel through which financial development could explain cross-country and cross-industry differences in realized productivity. I argue that financial development induces technological innovations - a major stimulus of productivity - through facilitating capital mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that financial development explains the cross-country differences in industry rates of technological progress, rates of real cost reduction and rates of productivity growth. I find that the effect of financial development on productivity and technological progress is heterogeneous across industrial sectors that differ in their needs for financing innovation. In particular, industries whose younger firms depend more on external finance realize faster rate of technological change in countries with more developed banking sector.