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Impact of Financial Development on Industrial R\&D: Evidence from OECD Countries

Author

Listed:
  • Kumar, Labesh
  • Neumann, Rebecca

Abstract

Whether financial development promotes industrial innovation depends not just on how developed a country’s financial system is, but on which dimensions of that system are well developed. This paper examines how depth, access, and efficiency of both financial institutions and financial markets shape R&D investment across industries that differ in their reliance on external finance. Using industry-level data from the ISIC Rev. 4 classification across 18 OECD countries from 1995 to 2019, and drawing on the IMF’s multidimensional Financial Development Index, we analyze how country-level financial development measures interact with an industry-level external finance dependence measure to influence R&D intensity measured relative to output and value added. Our findings show that the overall level of financial development matters primarily through depth. In particular, the depth of financial institutions and, to a lesser extent, the depth of financial markets significantly raise R&D intensity in industries that depend more heavily on external funding. Measures of access and efficiency display little systematic effect. The results are strongest within manufacturing industries, where innovation activity is concentrated. These findings highlight the importance of financial structure and, in particular, the scale and capacity of financial intermediation, in shaping the allocation of innovative investment across industries.

Suggested Citation

  • Kumar, Labesh & Neumann, Rebecca, 2026. "Impact of Financial Development on Industrial R\&D: Evidence from OECD Countries," MPRA Paper 128447, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:128447
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    References listed on IDEAS

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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