In this paper, we investigate the classical economic topic about the relationship between financial sector and the real economy by testing whether financial development eases firm’s financial restriction for investment. The role of financial development on the real economy is a controversial issue among scholars and economists. Even though there have been many previous studies in this regard, it is hard to say that there is unique agreement on this issue. However, since the seminal research by King and Levine (1993), many empirical and theoretical papers have shown that financial development could affect economic growth. Most of the works employed an empirical model using cross-country database and produced a similar conclusion about the relationship between finance and the real economy. However, their arguments have limits as they ignored the specificities of economic state of individual country. Unlike their uniformed perception of the relationship between financial development and the real economy, the effect of the former on the real economy could be varied by countries because of the diverse path of economic growth that each county takes. For this reason, country specific analysis would be more appropriate if we are interested in the role of financial development on specific country. Our interest lies on whether financial development would affect the real economy by easing firm’s financial restrictions in Korea. In this study, first, we show the recent development trend of both finance and real sectors in Korea, and introduce previous studies on the role of financial development in chapter 3. In chapter 4, we present an empirical model based on the work of Gilchrist and Himmelberg (1998) and Love (2003), to find out whether financial development in Korea ease firm’s external financing constraints. Lastly, we will briefly present the policy implications
