We examine the extent to which financial market development impacts the diffusion of 16 major technologies, looking across 17 countries, from 1870 to 2000. We find that greater depth in financial markets leads to faster technology diffusion for more capital-intensive technologies, but only in periods closer to the invention of the technology. In fact, we find no differential effect of financial depth on the diffusion of capital-intensive technologies in the late stages of diffusion or in late adopters. Our results are consistent with a view that local financial markets play a critical role in facilitating the process of experimentation that is required for the initial commercialization and diffusion of technologies.
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There is a related theoretical literature that links financial to economic development. See, for example, Greenwood and Jovanovic (1990) and Acemoglu and Zilibotti (1997) for models where financial markets reduce the risks associated with modern technologies inducing faster capital accumulation. These models do not capture technology diffusion and innovation. Jovanovic and MacDonald (1994) model the risks faced by entrepreneurs while the market settles in the final shape of innovations. Michalopoulos, Laeven et al. (2015) develop a model of growth through innovation with a financial sector that screens new projects. Unlike the focus of our paper, this paper emphasizes the screening role of financiers instead of its risk pooling role.
Our core estimations focus on 17 countries with the most comprehensive data over this period, but we also show the consistency of our results with a broader set of 55 countries where we have less comprehensive data.
We see bank credit and deposits as a proxy for the overall level of financial development, not just that of the banking sector. Nevertheless, it is also worth noting that there is growing evidence that banks play a (surprisingly) large role in directly financing innovation(e.g., Mann 2014; Chava et al. 2013; Nanda and Nicholas 2014). See Kerr and Nanda (2015) for a review.
In Table 9, we also report the results from regressions where we look at lagged financial development. Our results continue to remain robust using this specification.
Furthermore, there is no apparent reason why tradability should matter only in the initial stages of adoption.
A similar argument implies that the capital intensity classification is not proxying for whether goods/services are superior (i.e., have higher income elasticity of demand).
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We are extremely grateful to Bo Becker, Xavier Duran, Christian Fons-Rosen, Sabrina Howell, Lakshmi Iyer, Victoria Ivashina, Bill Kerr, James Lee, Aldo Musacchio, Tom Nicholas, and to the seminar participants at the Bank of Finland, George Washington University School of Business, Copenhagen Business School, MIT Sloan, HBS, and the NBER Productivity Lunch for helpful discussions. Zeynep Kabukcuoglu provided excellent research support. Comin thanks the INET Foundation for its generous support and Nanda acknowledges support from the Kauffman Foundation’s Junior Faculty Fellowship and the Division of Research and Faculty Development at Harvard Business School. All errors are our own.
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Comin, D., Nanda, R. Financial Development and Technology Diffusion. IMF Econ Rev 67, 395–419 (2019). https://doi.org/10.1057/s41308-019-00078-0