Is the Growth Effect of Financial Development Conditional on Technological Innovation?

This paper argues that excessive financial development in combination with high levels of technological innovation or R&D activities may lead to the former being ineffective in generating economic growth. This hypothesis is examined through a dynamic panel analysis using two measures of financial development, in conjunction with R&D expenditure, for 36 OECD and non-OECD countries. Using a range of panel data estimators, our results show that the relationship between financial development and economic growth is not straightforward; rather, it is conditional upon the level of R&D. Further, we find that a high level of R&D is associated with a weak or negative effect of financial development on economic growth