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

22 Pages Posted: 16 Mar 2015

See all articles by María Aristizábal-Ramírez

María Aristizábal-Ramírez

Universidad EAFIT

Gustavo J. Canavire-Bacarreza

Inter-American Development Bank (IDB); IZA Institute of Labor Economics

Maria Botero

Universidad EAFIT

Date Written: January 14, 2015

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 appropriate institutional conditions if they want financial development to spur growth through innovation.

Keywords: Financial Development, Innovation, Economic Growth, Developing Countries

JEL Classification: G00, G23, O31, O29

Suggested Citation

Aristizábal-Ramírez, María and Canavire Bacarreza, Gustavo Javier and Botero, Maria, Does Financial Development Promotes Innovation in Developing Economies? An Empirical Analysis (January 14, 2015). Center for Research in Economics and Finance (CIEF), Working Papers, No. 15-06. Available at SSRN: https://ssrn.com/abstract=2578451 or http://dx.doi.org/10.2139/ssrn.2578451

María Aristizábal-Ramírez (Contact Author)

Universidad EAFIT ( email )

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

Gustavo Javier Canavire Bacarreza

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Maria Botero

Universidad EAFIT ( email )

Carrera 49 N° 7 sur – 50
Bogotá, Antioquia 00000
Colombia

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