Innovation, Information and Financial Architecture

Abstract

Does a financial system architecture anchored on banks better than one centered on markets in fostering technological innovations as engine of growth? In a panel of industrial sectors across a large cross section of countries, I find that while market-based systems have a general positive effect on innovations in all economic sectors, bank-based systems foster more rapid technological progress in more information intensive industrial sectors, suggesting a heterogeneous impact of financial architecture. Thus, the relative performance of bank-based systems vis-à-vis market-based systems depends on the industrial structure of the economy.