Does Local Financial Development Matter?

In light of the recent explosion of internationalcapital mobility, it is important to consider the question of whether nationalfinancial institutions and markets still matter for growth once domestic agentshave access to foreign markets.Although this question is difficult toanswer empirically, it is helpful to study the effect of local financialdevelopment within a country that has been unified for over a century:Italy. Three datasets were involved in the study: the Survey of Household Incomeand Wealth, conducted by the Bank of Italy; a dataset containing information atthe province level about registered firms; and a dataset containing financialinformation about non-financial firms.These datasets were used in thedevelopment of a new indicator that measured financial development at the locallevel, relying on the idea that developed financial markets grant individualsand firms an easier access to external funds. Studies using the indicator revealed that individuals were 33 percent morelikely to start businesses if they moved from the least financially developedregion to the most financially developed one.Also, the most financiallydeveloped regions were characterized by the presence of comparatively youngentrepreneurs, a high ratio of new firms to population, and greater GDP growthrates. Although large firms, which can raise funds outside the local areamore easily, do not experience these effects to the degree that small andmedium-sized enterprises do, the evidence suggests that local financialdevelopment plays an important role in growth and will continue to do so asworld economic powers become more integrated.(SAA)