Essays on Financial Intermediation, Innovation, and Growth

Abstract

The presented work provides insight on the function and infrastructure of the modern financial system. In general, it examines the aggregate economic welfare and specifically looks at the different channels and mechanisms through which financial markets and institutions affect the real economy at the firm level. The first part of the dissertation specifically deals with the two functions, financing as well as payment and transaction services and how they affect firm growth in developed countries. Based on findings from the U.S. marijuana industry, access to banking services in developed countries remains vital for small- and medium-sized enterprises. Despite the emergence of FinTechs, it appears that banks today play a too integral part in transaction processing and safekeeping deposits, preventing widespread use of alternatives. Digital innovations, however, have the potential to revolutionize cross-border payments, which currently are still carried out via correspondent banks. Already in the near future, these inter-bank intermediaries could become superfluous as a result of a widespread use of distributed ledger technology. The second part focuses on the connection between finance and innovation-led growth. Here a theoretical model is presented which explores the innovative advantages of small firms over large firms. It is shown that small firms can be the patent winner if their innovative efficiency is high enough to overcome their financial constraints, even in cases of lower patent valuation. Large firms also utilize the higher innovative efficiency in small firms by engaging in Corporate Venture Capital (CVC). As CVC is becoming ever more popular, research interest will continue to increase. To promote future coherence in CVC research a standardized data-cleaning procedure is proposed.