Financial Development and TFP Growth: Cross-Country and Industry-Level Evidence
Peer Reviewed
Date issued
Jun 2009
Subject
Industrial Policy;
Financial Sector
JEL code
D24 - Production • Cost • Capital • Capital, Total Factor, and Multifactor Productivity • Capacity;
E44 - Financial Markets and the Macroeconomy;
O47 - Empirical Studies of Economic Growth • Aggregate Productivity • Cross-Country Output Convergence
Category
Working Papers
This paper estimates the impact of financial development on industry-level total factor productivity (TFP) growth using a largely unexploited panel of 77 countries with data for 26 manufacturing industries for the years 1963 to 2003. A significant relationship is found between financial development and industry-level TFP growth when controlling for country-time and industry-time fixed effects. The results are both statistically and economically significant. TFP growth can accelerate up to 0.6 percent per year, depending on the external finance requirement of industries, following a one standard deviation increase in financial development. The results are robust to different samples and specifications.
