Finance, investment and growth

1、Finance,InvestmentandGrowthWendyCarlinandColinMayerUniversityCollege,LondonandSaidBusinessSchool,UniversityofOxford18October,1998Commentsonthisdraftwouldbeappreciated.TheresearchforthisprojectwasfundedfromadonationfromthePeterMooresFoundationtotheSaidBusinessSchool.MuchoftheresearchwasdonewhileColinMayerwasonleaveattheDepartmentofEconomicsatStanfordUniversity,andheisgratefulforthefacilitiesthatwereprovided.WeareverygratefultoEsraErdemforoutstandingresearchassistanceontheprojectandtoJennyCorbett。

2、andNicholasOultonforprovisionofdataonJapanesebankfinanceandskilllevelsinGermanyrespectively.AbstractThispaperevaluatestherelationsbetweenindustrialactivityandthestructureoffinancialsystems,corporatesectorsandlegalarrangementsindifferentcountries.Usingdatafrom20OECDcountriesin27industriesovertheperiod1970to1995,weevaluatewhetherthereisalinkbetweenindustryactivityandacombinationofcountrystructuresandindustrycharacteristics.Wefindsignificantinterrelationsbetweenthetwobothintermsofindustrygrowthrate。

3、sandinvestmentshares.Therelationsaresensitivetocountries’stagesofeconomicdevelopment:forexample,thelinkbetweenconcentrationofownershipandeconomicactivityisofoppositesigninlowandhighincomecountries.ThereisstrongevidencethattherelationsbetweenfinancialstructureandeconomicactivitycomethroughexpendituresonR&Dratherthanfixedcapitalformation.Keywords:financialsystems,ownership,legalform,growth,investmentJELclassification:E2,G3,O4Finance,InvestmentandGrowthANon-TechnicalSummaryTherehasbeenmuchdiscussio。

4、noveralongperiodoftimeabouttherelationshipbetweenfinancialsystemsandeconomicperformance.Therelativeperformanceofbankandstockmarketorientedfinancialsystemshasbeendiscussedforthebestpartofacenturyandtheproblemsassociatedwithcorporationsbeingwidelyheldbyalargenumberofdispersedshareholdershasbeendebatedsincethe1930’s.Morerecently,attentionhasturnedtotheroleofdifferentlegalandregulatorystructuresinpromotingeconomicgrowth.Despitethelengthandintensityofthedebates,westillknowverylittleaboutthewayinwhich。

5、financial,corporateandlegalstructuresbearoneconomicperformance.Therehavebeenseveralstudiesthathavelookedatandfoundstrongrelationsbetweenfinancialandeconomicdevelopment.Buttheyareopentoanumberofcriticisms.Firstly,sincetheyareconcernedwithgrowthatthenationallevel,theysufferfromsmallnumbersofobservations.Secondly,theycanonlyprovidelimitedcontrolfortherangeofotherfactors,suchassavingsratesandnon-financialendowments,whichmayinfluenceeconomicperformance.Thirdly,theyhavebeenrestrictedtoassessmentsofwhe。

6、therthereisalinkbetweenfinancialandeconomicdevelopment.Theydonotthereforeaddresstherangeofotherquestionsthatlieattheheartofdebatesaboutfinancialsystems.Acentralissueiswhetherstockmarketsorbanksaremoreappropriateforpromotingeconomicdevelopmentand,moresubtly,whetherdifferenttypesoffinancialsystemspromotedifferenttypesofactivity.Forexample,ithasbeensuggestedthatstockmarketsmightbebetteratsupportingnew,riskyactivities(in,forexample,hightechnologyindustries)whereindividualslegitimatelyholddiverseview。

7、saboutfutureprospectsandstockmarketsperformavaluablefunctioninaggregatingtheseviews.Ontheotherhand,themonitoringofmoreroutineactivities,forexample,investmentinplantandmachinerymaybebetterdelegatedtoafinancialinstitutionwhichcanreducecostsofmonitoring.Similarly,corporatesectorswithconcentratedownershipmayovercomefreeriderproblemsofcorporatecontrolinsomeindustriesbutexacerbateproblemsofprivatebenefitsofcontrolinothers.Whileexistingstudieshavefocusedonaggregateeffectsoffinancialdevelopmentoneconomi。

8、cperformance,thispaperexaminestherelationshipofthestructureofcountries’financialsystems,corporatesectorsandlegalsystemstolevelsofactivityinindividualindustries.Weexploittheemergenceofanewclassofstatisticsthatprovidesmeasuresofthestructureoffinancial,corporateandlegalsystemsinalargenumberofcountries.Thesehaveopenedupthepossibilityof,forthefirsttime,undertakingseriousanalysisoftherelationbetweenfinance,corporateandlegalgovernanceandeconomicperformance.Wemaptheselargedatabanksoncountrystructurestot。

9、hecharacteristicsofawidevarietyofmanufacturingindustriesinanattempttoestablishwhetherthereisaninter-relationbetweenthetwo.Specifically,weareinterestedinwhethercountrystructures(financial,corporateandlegalforms)andcharacteristicsofindustries(dependenceon1externalfinanceandinvestmentsinskillsandtraining)arerelatedtolevelsofactivity(growthratesandlevelsofinvestment)oftheseindustriesindifferentcountries.Forexample,dobankorientedfinancialsystemspromotethegrowthofbankdependentindustries?Doownershipcon。

10、centrationsencourageinvestmentinskillintensiveindustries?ArestockmarketorientedcountriesassociatedwithinvestmentsinR&D?Weperformthisanalysisbycollectingdataongrowth,fixedcapitalformationandexpendituresonR&Din27manufacturingindustriesin20OECDcountriesover25yearsfrom1970to1995.Wecollectdataoncountrystructuresandindustrycharacteristics.Therearethreetypesofcountrystructurevariables.Thefirstismeasuresofthesizeofstockmarkets,bankingsystemsandownershipconcentration.Thesecondisinformationdisclosure(accou。