Patterns of Industrial Development Revisited : The Role of Finance
The authors 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). The autho...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/08/1997780/patterns-industrial-development-revisted-role-finance http://hdl.handle.net/10986/19269 |
| Summary: | The authors 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). The authors 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. |
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