Rethinking the Schumpeterian Revolution: The Linkage Between Financial Development, Technology, and Economic Growth

Abstract

Since the pioneering work done by Schumpeter, the linkage between finance, technology, and growth has been widely examined. Schumpeter claims that developed financial markets accelerate technologic progress and hence the level of economic growth increases because of the rising potential of technology. This idea is now understood that the development of financial markets is vital for both technological progress and economic growth. Therefore, this chapter aims to determine the linkages between finance, technology, and economic growth using unbalanced panel simultaneous equation system in the EU-member countries in the period from 1995 to 2013. The general results of the simultaneous equation system point out that growth and finance are in congruity indirectly, suggesting that economic growth process improves financial development level. Besides, the results reveal that in the first stage the financial development process of accelerating the technology level measured as R&D expenditures as a percent of gross domestic product and in the second stage a rise in technology level improve the economic growth. In general, it is said that the Schumpeterian hypothesis claiming the positive effect of finance on technology and positive effect of technology on growth is valid.