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Financial Structure and Economic Development: Firm, Industry, and Country Evidence

61 Pages Posted: 20 Apr 2016  

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Thorsten Beck

City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Ross Levine

UC Berkeley; National Bureau of Economic Research (NBER)

Date Written: June 2000

Abstract

A country's level of financial development and the legal environment in which financial intermediaries and markets operate critically influence economic development. In countries whose financial sectors are more fully developed and whose legal systems protect the rights of outside investors, economies grow faster, industries dependent on external finance expand more quickly, new firms are created more easily, firms have more access to external financing, and firms grow faster.

Beck, Demirguc-Kunt, Levine, and Maksimovic explore the relationship between financial structure - the degree to which a financial system is market- or bank-based - and economic development.

They use three methodologies:
· The cross-country approach uses cross-country data to assess whether economies grow faster with market- or bank-based systems.
· The industry approach uses a country-industry panel to assess whether industries that depend heavily on external financing grow faster in market- or bank-based financial systems and whether financial structure influences the rate at which new firms are created.
· The firm-level approach uses firm-level data across a broad selection of countries to test whether firms are more likely to grow beyond the rate predicted by internal resources and short-term borrowings in market- or bank-based financial systems.

The cross-country regressions, the industry panel estimations, and the firm-level analyses provide remarkably consistent conclusions:
· Financial structure is not an analytically useful way to distinguish financial systems.
· Financial structure does not help us understand economic growth, industrial performance, or firm expansion.
· The results are inconsistent with both market-based and bank-based views.

In other words, economies do not grow faster, industries dependent on external financing do not expand faster, new firms are not created more easily, firms' access to external finance is not greater, and firms do not grow faster in either market- or bank-based financial systems.

The authors find overwhelming evidence that the overall level of financial development and the legal environment in which financial intermediaries and markets operate critically influence economic development.

This paper is a product of Finance, Development Research Group. The study was funded by the Bank's Research Support Budget under the research project Financial Structures and Economic Development (RPO 682-41). The authors may be contacted at tbeck@worldbank.org or ademirguckunt@worldbank.org.

Suggested Citation

Maksimovic, Vojislav and Beck, Thorsten and Demirgüç-Kunt, Asli and Levine, Ross, Financial Structure and Economic Development: Firm, Industry, and Country Evidence (June 2000). World Bank Policy Research Working Paper No. 2423. Available at SSRN: https://ssrn.com/abstract=632494

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/

Thorsten Beck (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Asli Demirgüç-Kunt

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ross Levine

UC Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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