Structural change and financing constraints

In a multi-industry growth model, firms need external funds for productivity-enhancing R&D, and face financing constraints. The cost of research differs across industries, so financing constraints hinder industry productivity growth unevenly. Equilibrium industry dynamics map into a differences-in-differences regression specification where industry growth depends on the interaction between country financial development and industry R&D intensity. The paper provides a framework for interpreting several empirical results that rely on industry growth data in terms of R&D-induced technology transfer, and identifies a new channel for finance to encourage aggregate growth: the reallocation of resources towards sectors with rapidly expanding technological frontiers. (C) 2011 Elsevier B.V. All rights reserved.