Abstract
Innovation is the key to bringing changes in the traditional financial system. Innovation in the financial system being new financial products, hybrid financial institutions and new rules and regulations to reform existing financial system. Evolvement of financial institutions in the economy help economy in performing a financial function more effective and efficiently and such performance of financial institution promotes economic growth. The aim of the study to assess the relationship between institutional innovation and economic growth of Bangladesh over the period from 1991 to 2015. During this study, we employ the various econometric model to established association ship between institutional innovation and economic growth. Study results revealed that all the variables are stationary at level and after first difference all the variables become non-stationary. Test of Cointegration results revealed that innovation in the financial system through non-bank financial institutions and the financial market can contribute long run and CPI and spread rate can contribute in short run in the economic growth of Bangladesh. While Granger Causality Test revealed that Capital flow and GDP shows unidirectional causality but financial market development and GDP shows the Bidirectional causal relationship in the economy. It is also observed from causality analysis that capital flow and financial market development shows bidirectional causality, which indicated that innovation either in a financial institution or financial market can cause both variables and eventually influence on economic growth. So policymaker should consider the interrelationship between institutional innovation and economic growth while the formulation of economic policy because policy should expedite the development process in the financial system by making robust financial sector through encouraging financial innovation with banks, non-banks financial institution and capital market as well. Robust financial development can cause positively in overall economic growth in Bangladesh.
Highlights
Innovation spurs economic growth and transformation of the financial system of a country
GDP will be affected due to causes of capital flow from non-bank financial institutions and CPI in the economy but changes of GDP does not have any impact on Capital flow in the economy and level of CPI in long run, meaning that there is a Bi-directional relationship among GDP, Capital flow, and CPI
We observe a unidirectional relationship between GDP and Market capitalization meaning that in long run both market capitalization and GDP both causes each other in either direction, which is meaning that there is unidirectional causality, apart from this we observed that market capitalization and capital flow causes each other by same way as GDP and market capitalization
Summary
Innovation spurs economic growth and transformation of the financial system of a country. Innovation induces organizational changes and changes in the rule of the game. During the last thirty years, innovation has become the synonym for the development of nations, technological progress and driver of business success. Innovation nowadays is not the “creation of something new” and a panacea for the solution of a board range of problems. Innovation in the financial system change financial structure and change financial business practice as a whole. Considering the importance of financial institutions, innovation impact and consequences should be a monitor on a priority basis because the performance of financial institutions significantly affect the entire financial system and eventually adversely affected the economic progression of the country
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Schedule a callMore From: Journal on Innovation and Sustainability. RISUS ISSN 2179-3565
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