18 Nov 2014Working Paper Summaries

Financial Development and Technology Diffusion

by Diego Comin and Ramana Nanda

Most scholarship looking at the role of financial market development in productivity and economic growth has tended to focus on the role of better developed financial markets in allocating capital efficiently across investment opportunities. In this paper, the authors provide evidence for another key role played by well-developed financial markets: reducing the frictions associated with the adoption and the diffusion of new technologies. Using a large dataset that covers the diffusion of 16 major technologies across 55 countries and 130 years, the authors examine whether greater depth in the banking sector leads to faster diffusion of these new technologies. Results provide compelling evidence that banking sector depth facilitates the faster diffusion of more capital intensive technologies. This effect operates in the early stages of diffusion and in the early adopters of technology. Overall, the evidence points to the importance of capital markets for the experimentation required to overcome the initial hurdles of adoption and diffusion. Key concepts include:

Well-developed financial markets reduce the frictions associated with the adoption and diffusion of new technologies.
Domestic capital markets play a key role in the diffusion of technologies in a country, particularly in the early stages of the technology's lifecycle.

Author Abstract

We examine the extent to which financial market development impacts the diffusion of 16 major technologies, looking across 55 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 of technologies. This evidence also points to an important mechanism relating financial market development to technology diffusion and economic growth.