Financial Systems , Industrial Relations and , Industry

Asymmetric information problems on the labour and the financial market reduce private incentives to undertake activities necessary to attain the socially optimal rate of growth when the rate of innovation is endogenous. Institutional and contractual arrangements on both markets may help to correctly evaluate the long-term prospects of innovations, to protect the investment in specific assets and consequently lead to increased investment in R&D. When a particular type of innovation in a particular industry suffers from a particular type of informational and coordination problems, various institutional environments will lead to a different industrial specialization. Using various measures of financial and labour market characteristics in 19 OECD countries, interaction terms are constructed to measure the impact of these characteristics and their combinations on industrial activity and industrial portfolio selection. A systematic relation between certain institutional combinations and the type of industry that prospers in a particular country can be found.