The University of Southampton
University of Southampton Institutional Repository

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.
0966-4246
404
University of Southampton
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 (2003) Financial institutions and the wealth of nations: tales of development Southampton. University of Southampton (Discussion Papers in Economics and Econometrics, 404)

Record type: Monograph (Discussion 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.

PDF
0404.pdf - Other
Download (693kB)

More information

Published date: December 2003

Identifiers

Local EPrints ID: 33789
URI: https://eprints.soton.ac.uk/id/eprint/33789
ISSN: 0966-4246
PURE UUID: e2a98f1b-579e-4c07-8d4a-8dd54fa61e8a
ORCID for Jian Tong: ORCID iD orcid.org/0000-0001-9367-4853

Catalogue record

Date deposited: 18 May 2006
Last modified: 04 Oct 2018 00:33

Export record

Contributors

Author: Jian Tong ORCID iD
Author: Chenggang Xu

University divisions

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of https://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×