Financial Development, Innovation, and Economic Growth: Evidence from Developing Countries

Abstract

The study investigates the relationship between financial development, innovation, and economic growth in developing countries from 2000 to 2014. The findings suggest that factors such as the availability of physical resources, labor force participation, and technological advancements have a significantly positive influence on economic growth in developing countries. However, research and development activities exhibit a negative and significant impact on economic growth. Surprisingly, financial development shows a negative but insignificant impact on economic growth, suggesting a complex relationship between financial development and economic growth in these nations. The study's findings reveal that there is no causal relationship between gross fixed capital formation and economic growth. However, bidirectional causality exists between total labor force participation and economic growth, as well as between financial development and economic growth. Furthermore, the results indicate a unidirectional causality from technological changes to economic growth and from research and development to economic growth in developing countries. Based on these findings, the study recommends that developing countries focus on increasing gross fixed capital formation to achieve improved levels of economic growth. This suggests that policies aimed at enhancing investment in physical capital, such as infrastructure development and industrial expansion, may be particularly effective in fostering economic growth in these nations.