Financing Productivity- and Innovation-Led Growth in Developing Asia: International Lessons and Policy Issues

Growth in developing Asia will need to rely more on improvements in productivity growth and less on capital deepening. Although there is no single reform path to spur productivity growth, financial system deepening is central to a more efficient allocation of capital across sectors and can facilitate innovation and technology transfer. But malfunctioning financial systems can also result in the misallocation of resources, making it important that policymakers focus less on increasing the size of the financial sector and more on improving its intermediation function. The paper discusses the general policy priorities for further financial development in Asia based on financial sector realities in the region and the level of country income. Steps to mobilize Asia's ample private savings for long-term financing, especially to tackle the region's infrastructure deficit and improve access to financing for small and medium enterprises, can help raise productivity. Further, as many countries in Asia shift from a development model based on technology absorption to one that promotes innovation, specialized finance and investors can play a critical role in allowing innovative firms to conduct research, adopt technologies necessary for inventions, and ultimately commercialize innovations.