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Industrial Diversification, Financial Development and Productive Investments

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  • Alfredo Schclarek

    (Universidad Nacional de Córdoba)

Abstract

This paper analyzes, from a theoretical perspective, the role of the financial system to promote growth and macroeconomic stability. It also endogenously explains the performance of the financial systems as a consequence of industrial (or sectoral) diversification. In the model, the productive sector carries out R&D activities and finances its activities through the financial system. While vertical innovation fosters economic growth, horizontal innovation creates new industrial sectors and therefore generates an increase of industrial diversification. A larger industrial diversification deepens the financial system because it improves its possibilities of financing the productive sector. A more diversified economy (better financially developed as a result) will have higher growth rates and will be less volatile. There is a role for the government to subsidize innovation, especially horizontal innovation.

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File URL: http://www.bcra.gov.ar/pdfs/investigaciones/WP%202007%2026e%20Premio.pdf
File Function: Spanish version (versión en Español)
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Bibliographic Info

Paper provided by Central Bank of Argentina, Economic Research Department in its series BCRA Working Paper Series with number 200726.

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Length: 26 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:bcr:wpaper:200726

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Related research

Keywords: economic growth; financial development; imperfect information; industrial diversification; horizontal innovation; vertical innovation;

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  1. Holmstrom, Bengt & Tirole, Jean, 2000. "Liquidity and Risk Management," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 295-319, August.
  2. Koren, Miklós & Tenreyro, Silvana, 2005. "Volatility and Development," CEPR Discussion Papers 5307, C.E.P.R. Discussion Papers.
  3. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
  4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  5. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
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