The Role of Financial Development in Innovation: Panel Data Analysis of Asian Economies

Abstract

In this study author has attempted to investigate the effect of development of financial system on innovation score in selected Asian Economies. Two dimensions of the financial system have been studied in this research. These include development of financial intermediaries, measured by private sector credit as percentage of gross domestic product and development of financial markets, measured by market capitalization as percentage of gross domestic product. Annual data of 29 economies has been collected from year 2011-2022. In addition to the main independent variables, six control variables have been included namely control over corruption, gross domestic product, inflation rate, internet usage, trade balance and covid. Multiple regression analysis has been employed to achieve the research objectives. Empirical analysis reveals that private sector credit affects innovation positively while financial markets development affects innovation negatively. This leads to conclusion that during boom periods of stock markets, only bigger and stable firms enjoy benefits while small unlisted firms pursuing innovative projects get benefit from development of financial intermediaries. Control over corruption, GDP, inflation rate and trade balance are also significant and positive, which is in accordance with expected signs. However, internet usage has appeared insignificant. Covid variable also is not statistically significant. This suggests that, businesses may not have encountered significant challenges in innovative projects during the covid period relative to non-covid periods. On the basis of empirical analysis, it is recommended that government should strengthen financial institutions to enhance capacity of innovation and policy makers should make policies favoring international trade to facilitate innovation-based projects in the countries.