Abstract
We investigate in this paper the effect of financial development on innovation in emerging and developing countries. The estimation of panel threshold model for a sample 54 countries during the period 1980-2009 shows the presence of non linear effects in the relationship between financial development and innovation. We find a threshold value of economic development below which the financial development level has no significant impact on innovation and above which financial development has a significant positive impact on innovation. In sum, our findings suggest that the presence of a healthy economic environment is crucial for financial institutions to offer high-quality financial services, promoting more innovation.
Highlights
With the importance of knowledge as a prime driver of economic growth, initiatives aim to enhance a nation’s knowledge capacity
The purpose of this paper is to investigate the effect of financial development on innovation in emerging and developing countries
The estimation of panel threshold model shows the presence of non linear effects in the relationship between financial development and innovation
Summary
With the importance of knowledge as a prime driver of economic growth, initiatives aim to enhance a nation’s knowledge capacity. This study adds to the literature by examining the contribution of financial system in shaping the knowledge economy. Its objective is to evaluate the impact of financial development on technological innovation in emerging and developing countries. Financial development boosts innovation by improving resource allocation and investment toward strategic sectors as well as facilitating technology to promote growth (Ramirez et al, 2015). Due to the increasing importance of financial development, an empirical literature has developed examining its impact on innovation. Some findings suggest that financial intermediaries encourage innovative activities (Maskus et al, 2012, Tee et al 2014; Meierrieks, 2014), others show that financial development spurs innovation conditional in different factors, such as the size of the economy, the type of industries and its institutions (Dabla-Norris et al, 2012; Hsu et al, 2014; Sharma, 2007; Ramirez et al, 2015)
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