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Effect of financial development on innovation: Roles of market institutions

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  • Trinugroho, Irwan
  • Law, Siong Hook
  • Lee, Weng Chang
  • Wiwoho, Jamal
  • Sergi, Bruno S.

Abstract

Studies show that the impact of financial markets on innovation is mixed. This paper examines whether financial development can help explain the pace of innovation in 68 developed and developing countries during 1995–2018. By utilizing panel data and incorporating market institutions (market creating, market regulating, market stabilizing, and market legitimizing), we discovered a nonlinear effect in the finance–innovation relationship. Market institutions would enhance such a relationship, and the credit and equity market development levels are beneficial to a country's innovation only up to a certain threshold. The findings reveal a difference between developed and developing countries in terms of innovation, and more innovation activities are observed after the 2007–2009 global financial crisis.

Suggested Citation

  • Trinugroho, Irwan & Law, Siong Hook & Lee, Weng Chang & Wiwoho, Jamal & Sergi, Bruno S., 2021. "Effect of financial development on innovation: Roles of market institutions," Economic Modelling, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321001875
    DOI: 10.1016/j.econmod.2021.105598
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    Keywords

    Financial development; Institutions; Innovation; Nonlinearity; Dynamic system panel GMM; Regression discontinuity design;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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