Financialization of the Real Economy: New Empirical Evidence from the Non-financial Firms in India Using Conditional Logistic Model

Financialization, or the dominance of finance capital over the physical capital has been on rise across emerging economies during the last three decades. Though a vast literature exists on financialization and its impact on the institutional set up and power relations based on changing production structure of the developing countries, this paper is the first attempt in the literature to understand the impact of financialization on the non-financial firms in India. It was found that during the phase of rapid capital market development in India, there has been a growing tendency of the non-financial firms to put their resources in financial instruments rather than increasing their physical asset base. Contrary to the existing theories, not enough empirical evidence was found supporting the hypothesis that institutional shareholding generates short-termism within the non-financial sector in India. This result is an important contribution to the burgeoning literature of financialization as it shows that unlike developed economies, the conduit of financialization of real economy in developing countries is deceleration of their industrial sector's performance.