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Does Financial Development Promote Innovation in Developing Economies? An Empirical Analysis

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  • Maria Aristizabal-Ramirez
  • Maria Camila Botero-Franco
  • Gustavo Canavire-Bacarreza

Abstract

Using firm-level data from 2006 to 2013 for a set of developing countries, we examine the effects of financial development on innovation. Financial development boosts innovation by improving resource allocation and investment toward strategic sectors as well as facilitating technology to promote growth. Using binary response models as well as instrumental variable techniques to correct for endogeneity, we find robust but puzzling results. Contrary to most existing literature, financial development has a negative effect on the probability of a firm to innovate. The effect is conditional on firm size, and only larger firms are the ones that benefit from financial development. These results are robust to different measures of financial development. We argue that this is a result of the design of the financial system in regards to the lack of capital and the institutional system. Consequently, developing countries should first generate appropiate insitutional conditions if they want financial development to spur growth through innovation.
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  • Maria Aristizabal-Ramirez & Maria Camila Botero-Franco & Gustavo Canavire-Bacarreza, 2017. "Does Financial Development Promote Innovation in Developing Economies? An Empirical Analysis," Review of Development Economics, Wiley Blackwell, vol. 21(3), pages 475-496, August.
    • Handle: RePEc:bla:rdevec:v:21:y:2017:i:3:p:475-496
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    File URL: http://hdl.handle.net/10.1111/rode.12314
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    Cited by:

    1. Marco Carreras, 2023. "Fostering Innovation Activities with the Support of a Development Bank: Evidence from Brazil 2003–2011," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 35(3), pages 545-578, June.
    2. Jiawen Bai & Tianyu Bai & Chengyun Zhang, 2024. "Digitalization, new business Startups, information and Communication Technologies and product innovation: Evidence From China in the lens of sustainability," Evaluation Review, , vol. 48(1), pages 90-118, February.
    3. Gnangnon, Sèna Kimm, 2023. "Do Aid for Trade flows affect Technology Licensing in Recipient Countries?," EconStor Preprints 273419, ZBW - Leibniz Information Centre for Economics.
    4. Zhangsheng Jiang, 2020. "Can the Gap and Rating of Market Expectation Promote Innovation Input of China Manufacturers?," Sustainability, MDPI, vol. 12(5), pages 1-19, March.
    5. Kjell Hausken & John F. Moxnes, 2019. "Innovation, Development and National Indices," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 141(3), pages 1165-1188, February.
    6. Su-Yin Cheng & Han Hou, 2022. "Innovation, financial development, and growth: evidences from industrial and emerging countries," Economic Change and Restructuring, Springer, vol. 55(3), pages 1629-1653, August.
    7. Gopalan, Sasidaran & Sasidharan, Subash, 2020. "Financial liberalization and access to credit in emerging and developing economies: A firm-level empirical investigation," Journal of Economics and Business, Elsevier, vol. 107(C).

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    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O29 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Other

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