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Financial Development and Innovation: Cross-Country Evidence

46 Pages Posted: 23 Jan 2011 Last revised: 15 Jun 2014

Po-Hsuan Hsu

University of Hong Kong

Xuan Tian

Tsinghua University - PBC School of Finance

Yan Xu

HKU, Faculty of Business and Economics

Date Written: February 11, 2013

Abstract

We examine how financial market development affects technological innovation. Using a large data set that includes 32 developed and emerging countries and a fixed effects identification strategy, we identify economic mechanisms through which the development of equity markets and credit markets affects technological innovation. We show that industries that are more dependent on external finance and that are more high-tech intensive exhibit a disproportionally higher innovation level in countries with better developed equity markets. However, the development of credit markets appears to discourage innovation in industries with these characteristics. Our paper provides new insights into the real effects of financial market development on the economy.

Keywords: financial development; innovation; external finance dependence; high-tech intensiveness

JEL Classification: G15, O30, R11

Suggested Citation

Hsu, Po-Hsuan and Tian, Xuan and Xu, Yan, Financial Development and Innovation: Cross-Country Evidence (February 11, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1745682 or http://dx.doi.org/10.2139/ssrn.1745682

Po-Hsuan Hsu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Yan Xu (Contact Author)

HKU, Faculty of Business and Economics ( email )

Pok Fu Lam Road
Hong Kong
Hong Kong

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