| Abstract: |
The authors examine whether financial development boosts the growth of small
firms more than large firms and hence provides information on the mechanisms
through which financial development fosters aggregate economic growth. They
define an industry’s technological firm size as the firm size implied by
industrial specific production technologies, including capital intensities and
scale economies. Using cross-industry, cross-country data, the results
indicate that financial development exerts a disproportionately large effect
on the growth of industries that are technologically more dependent on small
firms. This suggests that financial development accelerates economic growth by
removing growth constraints on small firms and also implies that financial
development has sectoral as well as aggregate growth ramifications. This
paper—a product of the Finance Group, Development Research Group—is part of a
larger effort in the group to understand the growth finance link. |