Finance and Productivity: A Literature Review

Abstract

This paper surveys a broad range of studies and highlights the main findings of the empirical literature regarding business finance and productivity. Numerous studies analyse the productivity effects of financial development and frictions. The results suggest: 1) Financial development likely has favourable effects on productivity growth; 2) financial frictions that impede the efficient flow of finance can mitigate the positive effects through a variety of channels; and 3) the magnitudes of productivity costs of financial frictions generally appear modest in financially developed economies but are considerably larger in developing economies. The paper also reviews studies of the influence of specific mechanisms on productivity, such as human capital, corporate finance, financial sector efficiency, equity finance and venture capital. Some policies that hamper productivity growth include inefficient insolvency regimes that impede exit of low-productivity firms, poorly developed contract monitoring and enforcement systems between banks and firms, collateral constraints that impair resource reallocation and imperfect bank supervisory practices that diminish productive capital reallocation through distorted lending practices.

Modeling the Impacts of Venture Capital Investment on Firm Innovation

“…In this manner, VCs can inhibit the innovative behavior of its portfolio firms. In addition, to realize returns on investment as quickly as possible, VCs may focus more on commercializing existing technologies after entering the firms; they can also help firms expand rapidly, crowd out competitors, and create monopolies, thus ultimately hindering innovation [37].…”