Financial architecture and economic performance: International evidence

The paper examines the relation between the architecture of an economy's financial system-its degree of market orientation-and economic performance in the real sector. I find that while market-based systems outperform bank-based systems among countries with developed financial sectors. bank-based systems fare better among countries with underdeveloped financial sectors. Countries dominated by small firms grow faster in bank-based systems and those dominated by larger firms in market-based systems, The findings suggest that recent trends in financial development policies that indiscriminately prescribe market-oriented financial-system architecture to emerging and transition economics might be misguided because suitable financial architecture in and of itself could be a source of value. (C) 2002 Elsevier Science (USA).