Industrial Diversification, Financial Development and Productive Investments

Alfredo Schclarek ()

No 200726, BCRA Working Paper Series from Central Bank of Argentina, Economic Research Department

Abstract: This paper analyzes, from a theoretical perspective, the role of the financial system to promote growth and macroeconomic stability. It also endogenously explains the performance of the financial systems as a consequence of industrial (or sectoral) diversification. In the model, the productive sector carries out R&D activities and finances its activities through the financial system. While vertical innovation fosters economic growth, horizontal innovation creates new industrial sectors and therefore generates an increase of industrial diversification. A larger industrial diversification deepens the financial system because it improves its possibilities of financing the productive sector. A more diversified economy (better financially developed as a result) will have higher growth rates and will be less volatile. There is a role for the government to subsidize innovation, especially horizontal innovation.

Keywords: economic growth; financial development; imperfect information; industrial diversification; horizontal innovation; vertical innovation (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 O16 O30 O41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-12
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Journal Article: Industrial Diversification, Financial Development and Productive Investments (2007)
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