DISCLAIMER: Staff Discussion Notes (SDNs) showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. The views expressed in SDNs are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

DISCLAIMER: Staff Discussion Notes (SDNs) showcase policy-related analysis and research being developed by IMF staff members and are published to elicit comments and to encourage debate. The views expressed in Staff Discussion Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

, and other IMF colleagues for helpful comments and input. The paper also benefited from comments and suggestions by a number of home and host supervisory authorities and key private sector representatives of the financial industry. The views expressed in this paper are those of the authors.

The growth benefits from financial development are known to vary across industries. However, no systematic effort has been made to determine the technological characteristics shared by industries that grow relatively faster in more financially developed economies. Using the standard growth‐theoretic definition of technology in terms of the production function, we explore a range of technological characteristics that theory suggests might underpin differences across industries in the need or the ability to raise external finance. We find that industries that grow faster in more financially developed countries display greater R&D intensity and investment lumpiness, indicating that well‐functioning financial markets direct resources toward industries where growth is driven by R&D.

In a multi-industry growth model, firms require external funds to conduct productivityenhancing R&D, and face financing constraints. The cost of research differs across industries, so that financing constraints hinder productivity growth in some industries more than in others. Equilibrium industry dynamics map into a differences-indifferences regression specification where industry growth depends on the interaction between country financial development and industry R&D intensity. The paper provides a framework for interpreting several empirical results that rely on industry growth data in terms of R&D-induced technology transfer, and identifies a new channel for finance to encourage aggregate growth: the reallocation of resources towards sectors with rapidly-expanding technological frontiers.JEL Codes: G18, O14, O16, O33, O47.