Financial Development and International R&D Spillovers Through Trade: Evidence From Developing Countries

Abstract

This paper examines how financial development affects technological progress of 55 developing countries over the 2003 to 2016 period, with particular attention to the interaction between R&D spillovers and financial development. We find that financial development induces total factor productivity improvement in developing countries both directly and indirectly. While there has been a profound literature on the direct effect of financial development on total factor productivity improvement, the evidence of an indirect effect is relatively new. Specifically, the indirect effect takes place through international R&D spillovers from developed countries to developing countries. Between the two components of financial development, the financial institutional aspects exert a more significant effect on total factor productivity than that of their financial market counterparts. As this paper also re-examines the effectiveness of the North-South R&D spillovers, it conveys important implications for policymakers whose objectives are to promote technological development and economic performance.