Financial Architecture and Economic Performance: International Evidence

The paper examines the relation between the architecture of an economy's financial system—its degree of market orientation—and economic performance in the real sector. I find that while market-based systems outperform bank-based systems among countries with developed financial sectors, bank-based systems fare better among countries with underdeveloped financial sectors. Countries dominated by small firms grow faster in bank-based systems and those dominated by larger firms in market-based systems. The findings suggest that recent trends in financial development policies that indiscriminately prescribe market-oriented financial-system architecture to emerging and transition economies might be misguided because suitable financial architecture, in and of itself, could be a source of value. Journal of Economic Literature Classification Numbers: G1, G21, O1, 04.