Financial sector development

About: Financial sector development is a research topic. Over the lifetime, 1674 publications have been published within this topic receiving 90787 citations.

Venture Capital: A Case for Investment Promotion

Abstract: Venture capitalists provide risk capital and valuable monitoring services that are essential for the success of upstart companies. The financial sector’s expertise in monitoring investment proposals may increase with the accumulated experience in funding such projects. In the other direction, the productivity gains from learning lower the cost of venture capital finance and reinforce start-up investment. Since learning depends on aggregate investment, the effect is external to individual agents. The paper demonstrates how the nature of the externality depends on the state of financial sector development, and how the appropriate tax/subsidy policy should be tailored to it.

Recession and financial development: An empirical analysis

Abstract: This paper mainly examine the sensitivity level of economic recession to the financial sector development by ascertaining whether such relationship is linear and contingent on trade openness, GDP per capita, financial openness, institution, democracy and fuels. We employ annual data of 129 countries from all part of the world spanning 1990-2010 and invoke Ordinary Least Squares (OLS) estimation method; we applied Sasabuchi test to verify the inverse U-shape and estimate the extreme point. We also used semiparametric and regional exclusion based regression for robustness check. The nexus between recession and financial development assessment suggest that, the nonlinearity and thus U-shaped relationship is operational; additionally, when financial development increases, it is accompanied by a reduction in the depth of recessions; and this, up to a certain threshold. Beyond this brink, financial deepening correlates with deep recessions. Additionally, we found that trade openness have a positive on economic recession independently to the estimation method. For robustness check, estimations results first confirm the baseline findings in terms of magnitude and significance in the correlation coefficients; then, highlight sub-Saharan Africa (SSA), South Asia (SASIA) and Latin America and Caribbean (LAC) as the order of continental/regional importance in increasing magnitude. Finally, the semiparametric regression show that, the results of the parametric part converge with the previous results in general, and bear out with illustration the functional form of the nonlinear relation between recession and financial development. To the best of our knowledge, this is the first study examining this relationship using newly primary and hitherto almost unexploited “Rare macroeconomic disasters” data from Barro and Ursua (2012) which allow us to build a more specific proxy of the variable “economic recession”.

Impact of Foreign Banks

Abstract: This paper provides a critical assessment of the costs and benefits of foreign bank ownership. It reviews the extensive literature on the impact of foreign banks and uses a unique database on bank ownership, covering 129 countries, to (re-) examine a number of the issues discussed. It documents (changes in) foreign bank presence between 1995 and 2009, highlighting important differences across host and home countries and strong bilateral patterns. It finds that foreign banks tend to outperform domestic banks in developing countries, countries with weak institutions, and where foreign banks do not play a major role. In addition, being from a geographically close home country increases the profitability of foreign banks. In terms of impact, it shows that foreign banks can deter domestic financial sector development in developing countries, countries with weak institutions, and where foreign banks play a minor role. Examining the impact of foreign banks on financial stability, it finds that, during the global crisis, foreign banks reduced credit more compared to domestic banks in countries where they had a small role, but not when dominant or funded locally. These findings show that, when analyzing the impact of foreign bank presence, accounting for heterogeneity, including bilateral ownership, is crucial.