Innovation, financial development, and growth: evidences from industrial and emerging countries

The debate of the finance-growth nexus can be classified into three dimensions. First, a critical factor innovation that is interacted with financial institutions and thereby should have impact on economic growth is highly ignored. Second, most studies do not differentiate the effect of finance–growth nexus at different stages of economic development. Third, in relationship to the long-run finance-growth nexus, the short-run association has received less attention. This paper synthesizes the above three aspects and explores the long- and short-run effects of innovation and financial development on real economic sectors considering different levels of income. By analyzing a panel of data for 48 countries from 1971 to 2015, this study contends that the finance–growth and innovation–growth relationships vary with the time horizons and income levels. This paper highlights the critical role that innovation can play in the growth process and states that financial development is no longer a panacea for real economic growth.