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Financial Institutions and the Wealth of Nations: Tales of Development

Financial Institutions and the Wealth of Nations: Tales of Development
Financial Institutions and the Wealth of Nations: Tales of Development
Interactions between economic development and financial development are studied by looking at the roles of financial institutions in selecting R&D projects (including for both imitation and innovation). Financial development is regarded as the evolution of the financing regimes. The effectiveness of R&D selection mechanisms depends on the institutions and the development stages of an economy. At higher development stages a financing regime with ex post selection capacity is more effective for innovation. However, this regime requires more decentralized decision-making, which in turn depend on contract enforcement. A financing regime with more centralized decision-making is less affected by contract enforcement but has no ex post selection capacity. Depending on the legal institutions, economies in equilibrium choose regimes that lead to different steady-state development levels.
The financing regime of an economy also affects development dynamics through a ‘convergence effect’ and a ‘growth inertia effect’. A backward economy with a financing regime with centralized decision-making may catch up rapidly when the convergence effect and the growth inertia effect are in the same direction. However, this regime leads to large development cycles at later development stages. Empirical implications are discussed.
0265-8003
William Davidson Institute
Tong, Jian
8109179b-ff1d-483e-9ee0-bf3f96cda71b
Xu, Chenggang
e1e768e4-8182-4483-8c17-3458897db507
Tong, Jian
8109179b-ff1d-483e-9ee0-bf3f96cda71b
Xu, Chenggang
e1e768e4-8182-4483-8c17-3458897db507

Tong, Jian and Xu, Chenggang (2004) Financial Institutions and the Wealth of Nations: Tales of Development (William Davidson Institute Working Paper 672) Michigan, USA. William Davidson Institute 72pp.

Record type: Monograph (Working Paper)

Abstract

Interactions between economic development and financial development are studied by looking at the roles of financial institutions in selecting R&D projects (including for both imitation and innovation). Financial development is regarded as the evolution of the financing regimes. The effectiveness of R&D selection mechanisms depends on the institutions and the development stages of an economy. At higher development stages a financing regime with ex post selection capacity is more effective for innovation. However, this regime requires more decentralized decision-making, which in turn depend on contract enforcement. A financing regime with more centralized decision-making is less affected by contract enforcement but has no ex post selection capacity. Depending on the legal institutions, economies in equilibrium choose regimes that lead to different steady-state development levels.
The financing regime of an economy also affects development dynamics through a ‘convergence effect’ and a ‘growth inertia effect’. A backward economy with a financing regime with centralized decision-making may catch up rapidly when the convergence effect and the growth inertia effect are in the same direction. However, this regime leads to large development cycles at later development stages. Empirical implications are discussed.

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Published date: 1 April 2004

Identifiers

Local EPrints ID: 35159
URI: http://eprints.soton.ac.uk/id/eprint/35159
ISSN: 0265-8003
PURE UUID: aca397a2-1a77-436b-bbd1-27af7a4a48d6
ORCID for Jian Tong: ORCID iD orcid.org/0000-0001-9367-4853

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Date deposited: 19 May 2006
Last modified: 16 Mar 2024 03:25

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Contributors

Author: Jian Tong ORCID iD
Author: Chenggang Xu

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