Financial Development and Innovation-Led Growth : Is Too Much Finance Better?

We show that the expansion of financial sector may hurt innovative activities and hence the innovation-led growth, using data on 50 countries over the 1990-2016 period. Countries with higher level of financial development are found to have a smaller positive or insignificant effect on innovation. The marginal effect of innovation on growth is a decreasing function of financial development. Using a dynamic panel threshold method we re-examine the possible non-linearity between finance, innovation, and growth. We find that innovation exhibits an insignificant effect on output growth when credit to the private sector exceeds the level of 60% as a share of GDP. These results are not driven by banking crises, the long run effect of 2007-2008 financial crisis, or the ongoing European sovereign debt crisis