Revisiting the link between financial development and industrialization: evidence from low and middle income countries

Does financial development really spur industrialization in sub‐Saharan African countries?

“…The results suggest that financial development has a negative effect on industrialization in SSA.These results seem counterintuitive because one expects that financial development will boost industrialization in SSA. However, similar results have been found by Kothakapa et al (2021), who show that below a certain level of financial development, it has a negative effect on industrialization in low‐ and middle‐income countries. Furthermore, this finding might be explained by the fact that in countries with underdeveloped financial markets, financial development can generate resource misallocation (Marconi & Upper, 2017).…”

“…While the majority of studies have concluded a positive effect of financial development on industrialization, the second strand of literature highlights the non‐monotonic effect of financial development on industrialization. Several authors (Cecchetti and Kharroubi, 2012, 2019; Aghion et al, 2019; Kothakapa et al, 2021) showed a nonlinear relationship between financial development and industrialization. Cecchetti and Kharroubi (2012) concluded that: (i) financial development has a U ‐inverted shaped effect on productivity growth; and (ii) financial sector growth reduces productivity growth.…”

“…However, using data for 110 middle‐ and low‐income countries for the period 1970–2014, Kothakapa et al (2021) have of evidence a U ‐shaped relationship between financial and industrial development. Indeed, according to them, financial development has a negative effect on the growth of the manufacturing sector up to a certain point, beyond which the effect is positive.…”

“…Indeed, authors such as Cecchetti and Kharroubi (2019) and Aghion et al (2019) have shown evidence for a nonlinear link between financial development and industrialization. In addition, Kothakapa et al (2021) found that inadequate financial development harms the growth of the manufacturing sector but that after passing a certain threshold, its effect becomes positive.…”

Does corruption hinder the effect of financial development on economic complexity? Evidence from MENA countries

“…Conversely, studies such as Ewetan and Ike (2014) and Larrain (2006) show that greater financial development leads to reduced economic complexity, consistent with the Woo (1986)'s hypothesis. Moreover, a nonlinear U-shaped relationship has also been found (Kothakapa et al 2021). While these works have highlighted the lack of consensus around the effect of financial development on economic complexity, the reasons for this controversy, through the mediating factors, remain under-explored.…”