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The Influence of Financial Development on R&D Activity: Cross-Country Evidence

  • Young-Soon Hwang

    ()

    (Busan Development Institute, Dongrae-gu, Pusan, 305-714, Korea)

  • Hong-Ghi Min

    ()

    (Department of Management Science, Korea Advanced Institute of Science and Technology, 335, Gwahang-Ro, Yusong-Gu, Daejeon, 305-701, Korea)

  • Seung-Hun Han

    ()

    (Department of Management Science, Korea Advanced Institute of Science and Technology, 335, Gwahang-Ro, Yusong-Gu, Daejeon, 305-701, Korea)

The financial environment affects the level of R&D activity of a country. Using the proxy measures of macroeconomic financial environment variables, we show that cross-country differences in R&D activity, including expenditures, researchers, and patents etc., are correlated with the stock market turnover ratio. In particular, we found that the relationship was in direct relation to R&D expenditures or the number of researchers but indirect in relation to R&D outputs such as patents. These results imply that finance structure of an economy could enhance R&D activity through providing efficient resource allocation function. Other proxy measures of the financial environment such as banking sector size or stock market capitalization are not found to be significant. The size of the finance industry does not seem to change the national portfolio toward more high-risk innovative sectors. Financial quality, not size, determines the level of R&D intensity.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 13 (2010)
Issue (Month): 03 ()
Pages: 381-401

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Handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:03:p:381-401
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