The Impact of Financial Architecture on Technical Innovation

Abstract

While a large body of literature argues that financial intermediaries exert a causal impact on long-run growth, it doesn’t investigate the links between financial architecture and technological change. We seek to shed light on these links by exploring the relationship between financial architecture (FA) and what is assumed to be one of the main drivers of economic growth, the technological change (TC). We apply the stochastic frontier analysis (SFA) to estimate and decompose total factor productivity growth (TFP) into its main components: efficiency change (EC) and technological change (TC). As a second step we regress the technological change (TC) on a set of variables capturing the financial characteristics (“financial architecture”) of a sample of OECD countries in order to identify which features of the financial system affect the country’s rate of technological change. Our results confirm that better functioning financial systems – open and competitive – improve resource allocation and accelerate the country’s rate of technological change with positive impact on long-run economic growth.