Financial dependence and industry growth in Europe: Better banks and higher productivity

Robert Inklaar and Michael Koetter

No GD-100, GGDC Research Memorandum from Groningen Growth and Development Centre, University of Groningen

Abstract: Financial development stimulates growth, in particular in industries dependent on external finance. In this paper we show that more efficient banks are particularly important in stimulating both output and productivity growth, while traditional volume measures of finance are much less important for productivity growth. For this we exploit firm-level information to measure the dependence of industries on external finance and the efficiency of intermediaries. Our results are in line with Schumpeter?s (1912) contention that bankers provide resources to the most deserving entrepreneurs. Within the EU-25, growth gains are concentrated in the new member states.

Date: 2008
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