Financial Structure, Technology, and Economic Growth: A Structural Matching Perspective

• Published date: 01 January 2023
• Author: Dezhu Ye,Yunjue Huang,Xian Ye
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/cwe.12461

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 119–148, Vol. 31, No. 1, 2023 119

*Dezhu Ye, Professor, School of Economics, Jinan University, China. Email: gzydz@126.com; Yunjue

Huang, PhD Candidate, School of Economics, Jinan University, China. Email: 298332915@qq.com; Xian Ye

(corresponding author), Lecturer, Laboratory for Behavioral and Regional Finance, Guangdong University of

Finance, China. Email: 47-115@gduf.edu.cn. This research was supported fi nancially by the National Social

Science Foundation of China (No. 19AJY026).

Financial Structure, Technology, and Economic Growth:

A Structural Matching Perspective

Dezhu Ye, Yunjue Huang, Xian Ye*

Abstract

Different types of capital are better suited to financing technologies with different

risk profiles, and structural matching between finance and technology may critically

infl uence economic growth. Using cross-province panel data from China, we estimated

the impact of the matching relationship between regions’ financial structure and

technology level on economic growth. We show that: (i) the matching relationship had a

statistically signifi cant positive impact on economic growth; (ii) structural mismatching

reduced economic growth in comparison with the optimal matching point; (iii) structural

matching better facilitated economic growth in more developed regions; and (iv) capital

accumulation and technological progress were two of the main channels through which

matching influenced economic growth. We address potential endogeneity concerns

and perform robustness checks, and our results remain valid. Our findings provide

convincing evidence for the optimal fi nancial structure theory and explain China’s rapid

growth despite its comparatively underdeveloped securities market.

Keywords: economic growth, optimal financial structure, structural matching,

technology

JEL codes: E44, G10, O16

I. Introduction

A well-developed financial market is generally regarded as an essence for a less-

developed country to narrow its development gap with the developed countries

(Cull et al., 2013; Demirgüç-Kunt et al., 2013). However, China’s rapid catch-up in

the last decades is remarkable, when a huge bureaucratic banking system rather than a

developed fi nancial market has been its primary reliance. This Chinese miracle raises

Dezhu Ye et al. / 119–148, Vol. 31, No. 1, 2023

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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the question again to the optimal fi nancial structure theory, that is, whether the bank-

oriented or market-oriented fi nancial structure is optimal.

The optimal fi nancial structure theory seems unable to explain thoroughly China’s

economic growth path in terms of the finance-growth nexus (Liu and Zhang, 2020).

This theory’s shortcoming is that it focuses mainly on the evolution of the financial

system itself, debating the advantages and disadvantages of diff erent types of fi nancial

structures in mitigating the information asymmetry, and does not integrate the real

economy into a joint analysis. Typically, financial structure can be divided into a

bank-based one and a market-based one, and the real economy can also be divided

into multiple structures depending on the different production technologies applied

(Lin, 2011; Ju et al., 2015). Different types of financial structures have comparative

advantages when serving different technologies. For mature industries with

technological imitation and low market risk, bank-oriented fi nancial structures are more

effi cient in providing services. In contrast, market-oriented fi nancial structures are more

appropriate for technology-frontier industries with higher innovation uncertainty and

market risk (Lin et al., 2013). An appropriate matching relationship therefore occurs

when the risk preferences are correspondent between fi nancial structure and technology,

that is, when banks serve low-technology industries and the security market funds high-

technology industries. From this point of view, the development path in Europe and the

US is based on matching between a market-oriented financial structure and high-risk

technologies, which has been well established and explored in existing literature. It is

also widely believed to be the optimal path to economic growth (Demirgüç-Kunt et al.,

2013). In China, at the earlier stage of the country’s reform and opening up (in 1978),

the prevailing technologies tended to be characterized by low risk, and banks dominated

the fi nancial structure (Feng et al., 2021). This matching relationship also utilized the

comparative advantages of the banking system eff ectively in serving mature and low-

risk technologies. China has sustained rapid development for several decades based on

this relationship, taking advantage of its abundant resources and labor force (Lawrence,

2020). China’s growth path, which the literature has not fully explored with regard to

optimal fi nancial structures, motivates us to investigate whether the matching pattern of

a bank-oriented fi nancial structure and low-risk technology promotes economic growth

or not.

To do this, we quantify the matching relationship between fi nance and technology

from the structure perspective, then use cross-province panel data of China from 2000

to 2016 to estimate the infl uence of the matching relationship on economic growth. the

Chinese sample off ers several benefi ts for our investigation. First, China is the world’s

largest emerging economy and has the highest average economic growth rate in recent