Financial Development and Innovation Led-Growth: A Case of Selected Developing Countries

Abstract

To achieve higher economic growth is a main target of all economies throughout the world. Higher economic growth is determined by numerous factors and further it generates multiplier socioeconomics impact for the masses. This study has examined the role of financial development and innovation in deciding the level of economic growth in the case of developing countries for 2000-2020. Auto-Regressive Distributed Lag Model has been applied to examine the long-run and short-run coefficients of the model. The causality of the variables has been checked with the help of the Dumitrescu Hurlin Panel Causality test. The results show that the availability of physical resources, labor force participation and technological changes have significantly positive impact on economic growth of developing countries. R&D has a negative and significant impact on economic growth whereas financial development has a negative and insignificant impact on economic growth. The outcomes of the study show that there is no causal relationship between gross fixed capital formation and economic growth. A bidirectional causality is running between total labor force participation and economic growth, between financial development and economic growth. The results show that there is unidirectional causality is running from technological changes to economic growth, from R&D to economic growth of developing countries. The study recommends that developing countries can attain an improved level of economic growth, by raising gross fixed capital formation.