Finance and Development: A Tale of Two Sectors

Abstract

Income differences across countries primarily reflect differences in total factor productivity (TFP). More disaggregate data suggest that the TFP gap between rich and poor countries varies systematically across industrial sectors of the economy. For example, less developed countries seem particularly unproductive in manufacturing. We develop a quantitative framework to explain the relationship between aggregate/sectorlevel TFP and financial development across countries. Financial frictions distort the allocation of capital and talent across production units, adversely affecting measured productivity. In our model, sectors with larger scales of operation (e.g., manufacturing) have more financing needs, and are hence disproportionately vulnerable to financial frictions. Our quantitative analysis shows that financial frictions account for a substantial part of the observed cross-country differences in output per worker, aggregate TFP, sector-level relative productivity, and capital to output ratios.

Firm‐level Investment and Export Dynamics*

“…In the plastics industry, where marginal costs rise particularly rapidly for capital-constrained firms, reducing investment costs is a relatively effective policy for stimulating exports. In this sense our results mirror those in Manova (2008) and Buera et al (2011), which suggest that capital-intensive, financially dependent industries are likely to grow faster, domestically or internationally, in response to financial development.…”

Entrepreneurship, College, and Credit: The Golden Triangle

“…15 This constraint compares the value of repaying V n (a t , x t , y t , e) with the value of default, including the possibility that agents might choose different values of a t+1 off the equilibrium path. However, Buera, Kaboski, and Shin (2011) show that the incentive compatibility constraint takes the simple form:…”

Financial Development and the Sources of Growth and Convergence*

“…More recently, a line of research using calibration methods has investigated the role of financial frictions in explaining productivity differences across countries. Buera et al (2011) calibrate a model of entrepreneurship where financial frictions distort the allocation of capital and talent across production units. The assumption that manufacturing is characterized by a larger scale than services makes the former more vulnerable to financial frictions.…”