The relationship between financial development and innovation: Empirical evidence from selected Asian countries

Abstract

This study extends research on the relationship between financial development (FD) and innovation by dividing FD into bank‑based FD and stock‑market‑based FD and investigating their effects on innovation. The number of patent applications is used as a proxy for innovative activities, and the financial development of a country is measured by the development of the banking sector and the stock market. The study employs the two‑step Generalized Method of Moments (GMM) to test the relationship using a panel data set in 25 various Asian countries in the period from 2000 to 2015. The development of the banking sector and the stock market increase the number of patent applications, but their interaction calculated by financial structure is not related to innovation. The finding indicates that the development of a financial system encourages innovation regardless of the difference in the development level between its components. The study provides more insights into the impact of financial market development on the domestically economic activities.