Financial development and innovation-led growth: Is too much finance better?

By Xiaoyang Zhu, Stylianos Asimakopoulos, Jaebeom Kim. Journal of International Money and Finance, 2020

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We show that the expansion of financial sector may hurt innovative activities and hence the innovation-led growth, using data on 50 countries over the 1990–2016 period. Countries with higher level of financial development are found to have a smaller positive or insignificant effect on innovation. The marginal effect of innovation on growth is a decreasing function of financial development. Using a dynamic panel threshold method we re-examine the possible non-linearity between finance, innovation and growth. We find that innovation exhibits an insignificant effect on output growth when credit to the private sector exceeds a threshold level of about 60% as a share of GDP. These results are not driven by banking crises, the long run effect of 2007–2008 financial crisis, or the ongoing European sovereign debt crisis.

Subfields: Economics and Econometrics, Information Systems

View Paper: https://www.semanticscholar.org/paper/970ff4fe0b748da9f88eb20a2bf8f69bb09cf7df