The Effects of Financial Openness on Innovation: An Empirical Study

Abstract: Using data from 33 OECD countries for the years 1980-2014, we estimate the effects of financial openness on innovation through the use of fixed effects panel data regression. After establishing innovation as a core factor in technological growth, we derive, with the help of Schumpeterian models of growth, an argument that the financial system has a significant role in the development of innovations. The development of a country’s financial system should therefore lead to an increase in innovation. One particular way to increase the efficiency and competitiveness of the financial system could be to open the borders to the international financial community, which would allow for international transactions and increase the efficiency of the financial system. By using patents as a measurement for innovation and the Chinn-Ito Index for financial openness we run a regression which confirms our theory that openness indeed has an effect on innovations in a country.