#05-22
Financial Development and Technology
Solomon Tadesse
Abstract: Research in development economics reveals that the bulk of cross-country differences in
economic growth is attributable to differences in productivity. By some accounts, productivity
contributes to more than 60 percent of countries’ growth in per capita GDP. I examine a
particular channel through which financial development could explain cross-country and crossindustry
differences in realized productivity. I argue that financial development induces
technological innovations – a major stimulus of productivity - through facilitating capital
mobilization and risk sharing. In a panel of industries across thirty eight countries, I find that
financial development explains the cross-country differences in industry rates of technological
progress, rates of real cost reduction and rates of productivity growth. I find that the effect of
financial development on productivity and technological progress is heterogeneous across
industrial sectors that differ in their needs for financing innovation. In particular, industries
whose younger firms depend more on external finance realize faster rate of technological change
in countries with more developed banking sector.
Keywords: Financial Development, Productivity Growth, Technological Progress, Innovation
JEL classifications : G1, G21, G32, E44, O14, O31, O34, O4
