Financial Market Structures, Financial Market Openness, and the Innovation-Growth Nexus? Evidence from Developing Countries

Abstract

Over the last 30 years, there have been major reforms in the financial sectors of several developing countries, such as their banking systems, stock markets and bond markets. These reforms include the introduction of various policies to improve the innovative capacity of financial systems to enable industries to move up the global competitiveness value chain. Despite such financial reforms, the impact of these changes on financial systems’ innovative capacity remains unclear, as does the knock-on effect for economic growth in these countries. The primary objective of this study is to examine the dynamics between the financial reforms (relating to financial market structures and financial market openness), innovation and economic growth in developing countries. Using the error-correction model and Granger causal dynamics, a sample consisting of 38 developing economies (focusing on the period 1961–2022) was used to test the short-term and long-term dynamic relationships between the variables. The study found conclusive evidence that, in the long run, the financial market structure, financial market openness and innovation have a significant impact on economic growth. However, the results for the short term vary, based on the measures used for the financial market structure. The empirical results suggest that policy-makers in these countries should consider co-development policies pertaining to the financial market structure, financial openness and innovation to ensure that these countries stay on the path to sustainable economic growth.