Book Description

Fisman and Love analyze the relationship between financial development and inter-industry resource allocation in the short and long run. They suggest that in the long run, economies with high rates of financial development will devote relatively more resources to industries with a quot;naturalquot; reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short run the authors argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, they use a measure of industry-level quot;technologicalquot; financial dependence based on the earlier work of Rajan and Zingales (1998) and develop new proxies for shocks to (short-run) industry growth opportunities. The authors find differential effects of these measures on industry growth and composition in countries with different levels of financial development. They obtain results that are consistent with financially developed economies specializing in quot;financially dependentquot; industries in the long run, and allocating resources to industries with high growth opportunities in the short run.This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study finance and growth.