Does banking development play a key role in technological progress? The paper Credit Supply and Corporate Innovation (Journal of Financial Economics, Vol 109, Issue 3, September 2013, pages 835-855, doi: 10.1016/j.jfineco.2013.04.006) by Mario Daniele Amore (Department of Management and Technology and CRIOS) with Cédric Schneider (Copenhagen Business School) and Alminas Žaldokas (Hong Kong University of Science and Technology) provides strong evidence that banking sector liberalization has a positive effect on firm innovation, as measured by patent-based metrics.
While the relationship between economic prosperity and banking development is widely debated, establishing the direction of causality has been challenging. Along this line, the authors focus on an exogenous variation due to the staggered passage of interstate deregulation in the US banking industry during 1980s and 1990s. After these deregulations, out-of-state bank holding companies were allowed to acquire banks chartered in deregulating states. Banks generally took several advantages from the deregulation process, especially expanding across state borders. Also, deregulation leads to a higher use of more sophisticated monitoring and screening technologies and increased the credit supply.
The major findings by Amore, Schneider and Žaldokas suggest that interstate banking deregulation had significant beneficial effects on corporate innovative activities, in terms of both quantity and quality of these activities. After controlling for a host of firm characteristics, fixed effects, and other confounding factors, the three authors find that this deregulation caused a 12.6% rise in the number of patents granted to firms as well as a 10.1% increase in the importance of patent – measured by citations received. In other words, these findings suggest that firms exposed to deregulations adopted a bolder innovation policy.
However, other empirical evidence shows that the effect of banking deregulation on corporate innovation is very heterogeneous and especially, it is larger for firms operating in industries highly dependent upon external capital and firms that rely on bank debt. More particularly, the effect is larger for firms with high level of R&D expenditures in the post-deregulation period.This also suggests that the effect on innovation is driven by the relaxation of financial constraints for bank-dependent firms.
As final steps the authors try to go beyond the effect of corporate patenting trying to understand how this evidence has a more general effect on economic progress. Correlating the industry-level effects with future industry growth, it is shown that industries where deregulation has a higher impact on patenting experienced a higher subsequent increase of output growth.