Referee Report to the Paper “Banking Deregulation and Innovation” by Sudheer Chava, Alexander Oettl, Ajay Subramanian &Krishnamurthy V. Subramanian, 2007

Referee Report to the Paper “Banking deregulation and innovation” by Sudheer Chava, Alexander Oettl, Ajay Subramanian &Krishnamurthy V. Subramanian, 2007

Summary

“Schumpeter [1969] argued that financial systems are important in promoting innovations; economies with more efficient financial systems grow faster.”

Based on this view, the paper finds evidence that this also holds on the micro-level channels. By relying on the assumption of the endogenous growth, it finds evidence that banking deregulation has an effect on innovation of young, private firms and therefore influences economic growth. The paper tests four hypotheses concerning banking regulation and innovation by the specified category of firms.

Hypothesis 1. Intrastate deregulation led to a decrease in the level of innovation by young, private firms.

Hypothesis 2. Intrastate deregulation led to a decrease in the number of innovative projects undertaken by young, private firms that have payoffs in the “high” and “low” tails.

Hypothesis 3. Interstate deregulation led to an increase in the level of innovation by young, private firms.

Hypothesis 4. Interstate deregulation led to an increase in the number of innovative projects undertaken by young, private firms that have payoffs in the “high” and “low” tails.

The paper examines the development of patenting and further, using regression results, analyzes the effect of intra- and interstate banking deregulation on the level and risk of innovative activity by young, private firms including time and technology trends. To find out about the dynamics of innovation, the temporal impact, before and after certain years of deregulation is measured. With regression results of exploiting/exploring and product/process patents, the paper examines the effect of banking deregulation more diversified. Additionally the impact of banking deregulation on innovation, in states with a smaller share of small firms compared to states with a higher...