Financial Development and Innovation: The Role of Market Structure

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Authors
Zhu, Xiaoyang
Kim, Jaebeom
Issue Date
2023-12
Type
Article
Language
en-US
Keywords
Financial development , Innovation , Market competition , Nonlinear effect
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Abstract

We assess how financial development affects innovation. For this purpose, we employ a unique Research Quotient data set from 1980 to 2018, and observe significant inverted-U effects of financial development on innovation for equity and credit markets. Specifically, the effects of the markets are sector-specific, implying that the inverted-U effect of the equity market on innovation is mainly driven by its diminishing effect on innovation in high-technology industries, while credit markets mostly affect innovation in non-high-technology industries. Regarding the mechanism, we posit that the inverted-U shape between finance and innovation may be explained by the disproportionate funds allocation-induced market concentration.

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Citation
Zhu, X. & Kim, J. (2023). Financial Development and Innovation: The Role of Market Structure. Journal of Money, Credit and Banking. https://doi.org/10.1111/jmcb.13125
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John Wiley and Sons Inc.
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ISSN
0022-2879
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