Patterns of Industrial Development Revisited: The Role of Finance

44 Pages Posted: 27 Oct 2004

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Inessa Love

World Bank - Development Economics Data Group (DECDG)

Date Written: April 13, 2004


Fisman and Love reexamine the role of financial market development in the intersectoral allocation of resources. First, they characterize the assumptions underlying previous work in this area, in particular, that of Rajan and Zingales (1998). Theauthors argue that Rajan and Zingales (1998) implicitly test whether financial intermediaries allow firms to better respond to global shocks to growth opportunities. Second, the authors propose a more efficient alternative test of this hypothesis using statistical techniques developed in the social networks literature. Specifically, they find that countries have more highly correlated growth rates across sectors when they have well-developed financial markets, suggesting that financial markets play an important role in allowing firms to take advantage of global growth opportunities. These results are particularly strong when financial development takes into account both the level and composition of financial development: private banking appears to play a particularly important role in resource allocation. The authors' technique allows them to further distinguish between the "growth opportunities" hypothesis stated above and the alternative "finance and external dependence" hypothesis, which implies that countries with similar levels of financial development should specialize in similar sectors. They do not find evidence to support this alternative view of finance and development.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study access to finance.

Suggested Citation

Fisman, Raymond and Love, Inessa, Patterns of Industrial Development Revisited: The Role of Finance (April 13, 2004). World Bank Policy Research Working Paper No. 2877. Available at SSRN:

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
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Inessa Love

World Bank - Development Economics Data Group (DECDG) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States


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