Does Local Financial Development Matter?

Posted: 24 Nov 2009

See all articles by Luigi Guiso

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF); Einaudi Institute for Economics and Finance

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: 2002

Abstract

In light of the recent explosion of internationalcapital mobility, it is important to consider the question of whether nationalfinancial institutions and markets still matter for growth once domestic agentshave access to foreign markets.Although this question is difficult toanswer empirically, it is helpful to study the effect of local financialdevelopment within a country that has been unified for over a century:Italy. Three datasets were involved in the study: the Survey of Household Incomeand Wealth, conducted by the Bank of Italy; a dataset containing information atthe province level about registered firms; and a dataset containing financialinformation about non-financial firms.These datasets were used in thedevelopment of a new indicator that measured financial development at the locallevel, relying on the idea that developed financial markets grant individualsand firms an easier access to external funds. Studies using the indicator revealed that individuals were 33 percent morelikely to start businesses if they moved from the least financially developedregion to the most financially developed one.Also, the most financiallydeveloped regions were characterized by the presence of comparatively youngentrepreneurs, a high ratio of new firms to population, and greater GDP growthrates. Although large firms, which can raise funds outside the local areamore easily, do not experience these effects to the degree that small andmedium-sized enterprises do, the evidence suggests that local financialdevelopment plays an important role in growth and will continue to do so asworld economic powers become more integrated.(SAA)

Keywords: Economic development, Regional analysis, Regional development, Regional economies, Financial markets, Firm size

Suggested Citation

Guiso, Luigi and Guiso, Luigi and Sapienza, Paola and Zingales, Luigi, Does Local Financial Development Matter? (2002). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1510604

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Einaudi Institute for Economics and Finance ( email )

Via Sallustiana 62
rome, 00187
Italy

Paola Sapienza

Northwestern University - Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States
847-491-7436 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luigi Zingales

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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