Financial Development and Innovation: Cross Country Evidence
نویسندگان
چکیده
We provide cross-country evidence to examine how financial market development affects innovation. Using a large data set including 34 developed as well as emerging countries, we differentiate the impacts of equity market and credit market development on a country’s innovation productivity measured by patenting. Our baseline results show that, while the development of equity markets encourages innovation, credit market development impedes innovation. A rich set of tests shows that the baseline results are robust to endogeneity and reverse causality concerns. We further examine the effect of financial development on innovation making use of cross-sectional heterogeneity in countries’ investor protections, economic development degrees, and legal system origins. We find that the effect of financial development on innovation is more pronounced in emerging countries and in countries with stronger shareholder protection, weaker creditor protection, and English common law origin. Our evidence is robust to alternative proxies for financial development and innovation. JEL Classifications: G15; O30; R11
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