Financial Markets, Industrial Specialization and Comparative Advantage - Evidence from OECD Countries

Due to underlying technological and organizational differences, industries differ <p> in their need for external finance. Since services provided by the financial sector <p> are largely immobile across countries, the pattern of industrial specialization <p> should be influenced by the degree of financial development. We find this effect <p> to be strong. In fact, the financial sector has greater impact on industrial <p> specialization among OECD countries than differences in human and physical <p> capital. We also show that the causality indeed run from the financial sector to <p> specialization. Further, financial sectors are a source of comparative advantage <p> in a way consistent with the Hecksher-Ohlin-Vanek model. Results on which <p> aspects of financial systems that are of importance for specialization and <p> comparative advantage are also presented.