Competition in the Financial Sector and Growth: A Cross-Country Perspective

Abstract: The importance of competition in the financial sector has long been recognized although few formal empirical studies exist. The relationship between competition and access of firms to external financing and associated economic growth is ambiguous in theory. In this paper, we relate a competition measure to industrial growth for 29 banking systems. We find that the effects of competition on access to financing (and growth) can depend on the level of development of the financial system. Specifically, in countries with less developed financial systems financially dependent industries grow faster when the financial system is less competitive while in more developed financial systems, more competition is associated with higher growth