Financial Development and Industry Diversification

ALFREDO SCHCLAREK; JOSE LUIS NAVARRETE

Rosario

Congreso; XLVIII Reunión Anual AAEP; 2013

Asociacion Argentina de Economia Politica

This paper empirically studies industry or sector diversification as a determinant to financial development. The empirical evidence finds evidence that there is a robust relationship between industry (or sector) diversification and financial development. The theoretical explanation would be that an economy with more industries (or sectors) allows for a greater diversification of lending risk and thus a reduction in the aggregate risk of the financial system. This reduction in the aggregate risk of the financial system is what determines financial development. The policy implication is that the government should promote the creation of new industrial sectors by subsidizing R&D in order to foster financial development.