1. Industry Growth and Capital Allocation: Does Having a Market- or Bank-based system Matter? Thorsten Beck and Ross Levine

2. Two Competing Financial systems  Market-based system  Representative countries:USA, UK  Bank-based system  Representative countries:Germany, Japan

3. Key Issue  Which type of financial system is more advanced in terms of facilitate economic growth? Policy Implications for developing country

4. Four Competing Views  Bank-based view  Market-based view  Financial Services view  Law and finance view

5. Bank-based view  Gerschenkron(1962)  Banks more effectively finance industrial expansion in developing countries  Rajan and Zingales(1999)  Powerful banks induce firms to reveal information  Banks without regulatory restrictions achieve optimal size  Stulz(2000)  Banks effectively provide external resources to firms which need stage financing

6. Market-based view  Allocating Capital effectively  Hellwig(1991), Rajan(1992) Powerful banks hinder innovation  Hellwig(1998), Wenger and Kaserer(1998) Collusion problem in bank-based system  Allen(1993) Financial markets promote R&D-based firms

7. Financial services view  Levine(1997)  Focusing on financial system’s ability to provide specific services: revealing information, reducing transaction cost, etc.

8. Law and finance view  La Porta,Lopez-de-silanes,Shleifer and Vishny(2000) The role of legal system in determining the level of financial development The more protection on outside investors, the advanced the financial system

9. Testify these hypothesis  Criterions of good financial system: 1.Providing external finance 2.Facilitating the formation of new establishment 3.Improving the efficiency of capital allocation across industries

10. Methodology  Panel Methodology:Cross-industry,cross- country Regressions From Rajan and Zingales(1998)  Cross-Country Methodology:Investment Flow Efficiency From Wurgler(2000)

11. Panel Methodology Basic Model

12. Some variables External: External Finance Dependence Definition: the ratio of capital expenditures minus cash flow from operations divided by capital expenditures Data resource: Compustat FS: Financial development Indicator: Finance-Aggregate Definition: The first principal component of Finance-Activity and Finance-Size

13.  FS:Financial Structure Three Indicators: 1.Structure-Aggregate Definition: The first principal component of Structure-Activity and Structure –Size 2.Restrict-Aggregate Grading the restrictions on banks 3.State Ownership Definition: the percentage of assets of the 10 largest banks owned by government

14. Extension of basic model(1)

15. Extension of basic model(2)

16. Predictions of different views  Market-based view: 1.Structure-Aggregate 2. Restrict-Aggregate 3. State Ownership

17. Predictions of different views  Bank-based view: 1.Structure-Aggregate 2. Restrict-Aggregate 3. State Ownership

18. Predictions of different views  Financial-services view:  Law and Finance view:

19. Cross-country Methodology  Basic model:

20. Conclusion  The results support the financial services and law and finance views.  No support for either the bank-based or the market-based views.