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Financial development and growth in the short and long run

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Author Info
Fisman, Raymond
Love, Inessa

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Abstract

The authors analyze the relationship between financial development and inter-industry resource allocation in the short and long run. They suggest that in the long run, economies with high rates of financial development will devote relatively more resources to industries with a"natural"reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short run the authors argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, they use a measure of industry-level"technological"financial dependence based on the earlier work of Rajan and Zingales (1998) and develop new proxies for shocks to (short-run) industry growth opportunities. The authors find differential effects of these measures on industry growth and composition in countries with different levels of financial development. They obtain results that are consistent with financially developed economies specializing in"financially dependent"industries in the long run, and allocating resources to industries with high growth opportunities in the short run.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3319.

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Date of creation: 01 May 2004
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Handle: RePEc:wbk:wbrwps:3319

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Keywords: Public Health Promotion; Health Monitoring&Evaluation; Banks&Banking Reform; Water and Industry; Payment Systems&Infrastructure; Achieving Shared Growth; Water and Industry; Governance Indicators; Health Monitoring&Evaluation; Banks&Banking Reform;

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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.:
  1. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December. [Downloadable!] (restricted)
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  2. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
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  3. de la Fuente, Angel & Marin, JoseMaria, 1996. "Innovation, bank monitoring, and endogenous financial development," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 269-301, October. [Downloadable!] (restricted)
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  4. Thorsten Beck & Ross Levine, 2002. "Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?," NBER Working Papers 8982, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Blackburn, Keith & Hung, Victor T Y, 1998. "A Theory of Growth, Financial Development and Trade," Economica, London School of Economics and Political Science, vol. 65(257), pages 107-24, February. [Downloadable!] (restricted)
  6. Raymond Fisman & Inessa Love, 2003. "Trade Credit, Financial Intermediary Development, and Industry Growth," Journal of Finance, American Finance Association, vol. 58(1), pages 353-374, 02. [Downloadable!] (restricted)
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  7. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August. [Downloadable!] (restricted)
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  8. Stijn Claessens & Luc Laeven, 2003. "Financial Development, Property Rights, and Growth," Journal of Finance, American Finance Association, vol. 58(6), pages 2401-2436, December. [Downloadable!] (restricted)
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  9. Raymond Fisman & Inessa Love, 2004. "Financial Development and Intersectoral Allocation: A New Approach," Journal of Finance, American Finance Association, vol. 59(6), pages 2785-2807, December. [Downloadable!] (restricted)
  10. Nicola Cetorelli, 2001. "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data," Journal of Finance, American Finance Association, vol. 56(2), pages 617-648, 04. [Downloadable!] (restricted)
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  11. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law, endowments, and finance," Journal of Financial Economics, Elsevier, vol. 70(2), pages 137-181, November. [Downloadable!] (restricted)
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  12. Harrigan, James, 1996. "Openness to trade in manufactures in the OECD," Journal of International Economics, Elsevier, vol. 40(1-2), pages 23-39, February. [Downloadable!] (restricted)
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. Ju, Jiandong & Wei, Shang-Jin, 2005. "Endowment Versus Finance: A Wooden Barrel Theory of International Trade," CEPR Discussion Papers 5109, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Kalina Manova, 2008. "Credit Constraints, Heterogeneous Firms, and International Trade," NBER Working Papers 14531, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Ciccone, Antonio & Papaioannou, Elias, 2006. "Adjustment to Target Capital, Finance and Growth," CEPR Discussion Papers 5969, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Martinsson, Gustav, 2009. "Finance and R&D Investments - is there a debt overhang effect on R&D investments?," Working Paper Series in Economics and Institutions of Innovation 174, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies. [Downloadable!]
  5. Christian Saborowski, 2009. "Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?," IMF Working Papers 09/20, International Monetary Fund. [Downloadable!]
  6. Jiandong Ju & Shang-Jin Wei, 2008. "When Is Quality of Financial System a Source of Comparative Advantage?," NBER Working Papers 13984, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Martinsson, Gustav, 2008. "Firm Collateral and the Cyclicality of Knowledge Intensity," Working Paper Series in Economics and Institutions of Innovation 134, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies. [Downloadable!]
  8. Enrico Perotti & Paolo Volpin, 2007. "Investor Protection and Entry," Tinbergen Institute Discussion Papers 07-006/2, Tinbergen Institute. [Downloadable!]
  9. Pietrovito, Filomena, 2009. "Investment decisions, price-earnings ratios and finance. Evidence from firm-level data," Economics & Statistics Discussion Papers esdp09054, University of Molise, Dept. SEGeS. [Downloadable!]
  10. Elias Papaioannou, 2007. "Finance and growth - a macroeconomic assessment of the evidence from a European angle," Working Paper Series 787, European Central Bank. [Downloadable!]
  11. von Furstenberg, George M., 2004. "Consumption Smoothing Across States and Time : International Insurance vs. Foreign Loans," Discussion Paper Series 1: Economic Studies 2004,13, Deutsche Bundesbank, Research Centre. [Downloadable!]
  12. von Furstenberg, George M., 2004. "The Contribution of Rapid Financial Development to Asymmetric Growth of Manufacturing Industries : Common Claims vs. Evidence for Poland," Discussion Paper Series 1: Economic Studies 2004,34, Deutsche Bundesbank, Research Centre. [Downloadable!]
  13. Ciccone, Antonio & Papaioannou, Elias, 2005. "Human Capital, the Structure of Production, and Growth," CEPR Discussion Papers 5354, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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