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Financial structure and economic development - firm, industry, and country evidence

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Author Info
Beck, Thorsten
Demirguc-Kunt, Asli
Levine, Ross
Maksimovic, Vojislav

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Abstract

The authors explore the relationship between financial structure - the degree to which a financial system is market- or bank-based - and economicdevelopment. They use three methodologies: 1) The cross-country approach uses cross-country data to assess whether economies grow faster with market- or bank-based systems. 2) The industry approach uses a country-industry panel to assess whether industries that depend heavily on external financing grow faster in market- or ban-based financial systems, and whether financial structure influences the rate at which new firms are created. 3) The firm-level approach uses firm-level data across a broad selection of countries to test whether firms are more likely to grow beyond the rate predicted by internal resources, and short-term borrowings in market- or bank-based financial systems. The cross-country regressions, the industry panel estimations, and the firm-level analyses, provide remarkably consistent conclusions: a) Financial structure is not an analytically useful way to distinguish financial systems. b) Financial structure does not help us understand economic growth, industrial performance, or firm expansion. c) The results are inconsistent with both market-based and bank-based views. In other words, economies do not grow faster, industries dependent on external financing do not expand faster, new firms are not created more easily, firms'access to external finance is not greater, and, firms do not grow faster in either market- or bank-based financial systems. The authors find overwhelming evidence that the overall level of financial development, and the legal environment in which financial intermediaries, and markets operate, critically influence economic development.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2423.

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Date of creation: 31 Aug 2000
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Handle: RePEc:wbk:wbrwps:2423

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Related research
Keywords: Fiscal&Monetary Policy; Payment Systems&Infrastructure; Economic Theory&Research; Labor Policies; Banks&Banking Reform; Governance Indicators; Banks&Banking Reform; Economic Theory&Research; Macroeconomic Management; Achieving Shared Growth;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Raghuram G. Rajan & Luigi Zingales, 2001. "Financial Systems, Industrial Structure, and Growth," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 467-482.
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  5. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank. [Downloadable!]
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  15. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1999. "Institutions, financial markets, and firm debt maturity," Journal of Financial Economics, Elsevier, vol. 54(3), pages 295-336, December. [Downloadable!] (restricted)
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  26. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Claessens, Stijn & Klingebiel, Daniela & Schmukler, Sergio L., 2002. "Explaining the migration of stocks from exchanges in emerging economies to international centers," Policy Research Working Paper Series 2816, The World Bank. [Downloadable!]
    Other versions:
  2. Stepan Jurajda & Janet Mitchell, 2001. "Markets and Growth," GE, Growth, Math methods 0111001, EconWPA. [Downloadable!]
    Other versions:
  3. Luigi Guiso & Tullio Jappelli & Mario Padula & Marco Pagano, 2004. "Financial Market Integration and Economic Growth in the EU," CSEF Working Papers 118, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  4. César Calderón & Alberto Chong, 2009. "Labor market institutions and income inequality: an empirical exploration," Public Choice, Springer, vol. 138(1), pages 65-81, January. [Downloadable!] (restricted)
  5. Veronika Dolar & Césaire Meh, 2002. "Financial Structure and Economic Growth: A Non-Technical Survey," Working Papers 02-24, Bank of Canada. [Downloadable!]
  6. Lawrence White, 2002. "International Trade In Services: More Than Meets the Eye," Working Papers 02-13, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  7. Gérard Charreaux, 2004. "Corporate Governance Theories: From Micro Theories to National Systems Theories," Working Papers FARGO 1041202, Université de Bourgogne - Latec/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  8. Rao, B. Bhaskara & Tamazian, Artur & Singh, Rup & Vadlamannati, Krishna Chaitanya, 2008. "Financial developments and the rate of growth of output: An alternative approach," MPRA Paper 8605, University Library of Munich, Germany. [Downloadable!]
  9. Christophe Hurlin & Baptiste Venet, 2008. "Financial Development and Growth: A Re-Examination using a Panel Granger Causality Test," Working Papers halshs-00319995_v1, HAL. [Downloadable!]
  10. Karin Jõeveer & Peter Tóth, 2006. "Does the Introduction of the Euro affect the Debt-Equity Choice?," Keele Economics Research Papers KERP 2006/22, Centre for Economic Research, Keele University. [Downloadable!]
  11. Hoekman, Bernard & Smarzynska Javorcik, Beata, 2004. "Policies facilitating firm adjustment to globalization," Policy Research Working Paper Series 3441, The World Bank. [Downloadable!]
    Other versions:
  12. Ramdane Djoudad & Jack Selody & Carolyn Wilkins, 2005. "Does Financial Structure Matter for the Information Content of Financial Indicators?," Working Papers 05-33, Bank of Canada. [Downloadable!]
  13. Pietro Tommasino, 2006. "The Political Economy of Investor Protection," Temi di discussione (Economic working papers) 604, Bank of Italy, Economic Research Department. [Downloadable!]
  14. Gérard Charreaux, 2004. "Les théories de la gouvernance:de la gouvernance des entreprises à la gouvernance des systèmes nationaux," Working Papers FARGO 1040101, Université de Bourgogne - Latec/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  15. Chen, Yiu Por & Liu, Mingxing & Zhang, Qi, 2006. "Development of Financial Intermediation and the Dynamics of Rural-Urban Inequality: China, 1978-98," Working Papers RP2006/65, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  16. Wendy Carlin & Colin Mayer, 1999. "Finance, Investment and Growth," OFRC Working Papers Series 1999fe09, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
  17. O. Emre Ergungor, 2003. "Financial system structure and economic development: structure matters," Working Paper 0305, Federal Reserve Bank of Cleveland. [Downloadable!]
  18. Impavido, Gregorio & Musalem, Alberto R. & Tressel, Thierry, 2001. "Contractual savings institutions and banks'stability and efficiency," Policy Research Working Paper Series 2751, The World Bank. [Downloadable!]
  19. Teemu Haukioja & Jarmo Hahl, 2001. "The Emergence of the New Economy, and its Challenge to Financial Intermediation and Banking," Discussion Papers 772, The Research Institute of the Finnish Economy. [Downloadable!]
  20. Rogério Studart, 2001. "Integrating Uneven Partners: the Destabilizing Effects of Financial Liberalization and Internationalization of Latin American Economies," Anais do XXIX Encontro Nacional de Economia [Proceedings of the 29th Brazilian Economics Meeting] 045, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  21. Franz R. Hahn, 2002. "The Finance-Growth Nexus Revisited. New Evidence from OECD Countries," WIFO Working Papers 176, WIFO. [Downloadable!]
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