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.

No abstract

No abstract

No abstract

Highlights• The data indicate that, along the development path, countries shift resources towards manufacturing industries that experience the most rapid productivity growth, but towards broad sectors that experience relatively slow productivity growth. • This is consistent patterns of structural transformation in a calibrated multi-industry growth model. • The "productivity mechanism" for structural transformation can thus account for the finding in the literature that along the development path countries start out specialized, become gradually more diversified and subsequently specialize again. AbstractEconomies diversify and then re-specialize as they develop. These "stages of diversification" may result from productivity-driven structural change if initially resources are concentrated in industries other than those that dominate economic structure in the long run. A calibrated multi-industry growth model with many countries and with industry differences in productivity growth rates replicates the main features of the "stages of diversification". We also present evidence that countries systematically shift resources towards manufacturing industries with rapid productivity growth, and towards sectors with low productivity growth, consistent with the model and supporting the "productivity mechanism" for structural transformation.