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Financial Dependence and Growth: the Role of Input-Output Linkages

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Abstract

We widen the understanding of the finance-growth nexus by accounting for the indirect effect of financial development through input-output (IO) linkages in determining the growth of industries across countries. If financial development is expected to promote disproportionately more the growth of industrial sectors that are more in need of external finance, it also favours more the industries that are linked by IO relations to more financially dependent industries. We explore this new channel in a sample of countries at different development stages over the period 1995-2007. Our results highlight that financial development, besides easing the growth of industries highly dependent on external finance, also fosters the growth of industries strongly linked to highly financially dependent upstream industries. Moreover, the indirect effect - propagated through IO linkages - of finance has a higher and non-negligible role compared to the direct effect and its omission leads to a biased and underestimated perception of the role of finance for industries growth.

Suggested Citation

  • Alessia Lo Turco & Daniela Maggioni & Alberto Zazzaro, 2018. "Financial Dependence and Growth: the Role of Input-Output Linkages," CSEF Working Papers 516, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:516
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    1. Ductor, Lorenzo & Grechyna, Daryna, 2015. "Financial development, real sector, and economic growth," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 393-405.
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    3. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
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    6. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    7. Dominick Bartelme & Yuriy Gorodnichenko, 2015. "Linkages and Economic Development," NBER Working Papers 21251, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    manufacturing growth; financial development; upstream and downstream linkages;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • G1 - Financial Economics - - General Financial Markets
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis

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