Empirical Evidence-Financial Systems and Economic Activity Essay

Empirical Evidence-Financial Systems and Economic Activity - Essay Example er, it was found that the expenditures over research and development, and not fixed capital formation, serve are the medium through which this impact takes place. It was also observed that the interaction amongst the structures and the industrial activity of the country greatly depends upon the levels of its economic growth. The concluding chapter of this paper explains the implications for the economic policy of the consideration that the institutional structure might be inter-related with the type of activity. 2. Review of Economic Performance and Financial Systems Joseph Schumpeter explained in 1912 that how the provision of loan was essential for the development and for the entrepreneurship. According to him, despite giving loan is not central to the normal circular flow, it is true that there exists a gap to overcome in the execution of new combinations. He further affirmed that the obligation of the lender is to bridge this gap, which he very well does by placing the power-to-p urchase developed ad hoc at the disposal of the businessman. Thorstein Veblen observed that the mechanism of assessing firms subject to â€Å"standardized bureaucratic routine† adopted by the entrepreneurs whom he referred to as the â€Å"lieutenants of finance† where as he dubbed the â€Å"syndicated bankers† as the â€Å"captain of finance† (Veblen, 1919). Nevertheless, Robert Lucas, among various others, debates that the economists poorly exaggerated the importance of financial attributes in economic performance (Lucas, 1988). While the significance of financial systems is doubtful, the efficacy of various sorts of financial systems has been found to be even more controversial. Clapham (1936) in his work agreed with the views of a principal officer of one of the Great Banks of Germany that... The paper includes the theoretical literature on the interaction among the financial and corporate mechanisms and the types of economic activities. Link of high risk R & D type activities has been established with the dispersed ownership financial systems and the market based financial systems, in case of the significant imposition of strict budget constraints. On the other hand, the financial systems with concentrated ownership and the bank oriented financial systems should be linked to long term investment with stimulated nature, in case of financial structures that require commitments to other stakeholders. This paper makes a conclusion that the empirical analyses of the relationship between the types of economic activity and financial and corporate systems are currently at its initial stage, they have significant policy implications if they are promoted through the provision of further evidence in this regard. Specifically, they indicate that there is not essentially a commanding financial system that is suitable for all economies or for all industries inside an economy. The financial systems or considerations that are deemed appropriate for a developed economy might turn inappropriate for a developing economy. Similarly what is appropriate for a highly innovative R & D economy might be inappropriate for a more imitative economy. There might be essential adjustments in making financial systems to comply with the countries’ stages of economic development, industrial bases, regulatory and legal policies.