Suheyla Ozyildirim, Zeynep Onder, Bilkent University, Ankara, Turkey
REGIONAL DEVELOPMENT AND BANKING ACTIVITY - EVIDENCE FROM SPATIAL ANALYSIS IN TURKEY (assigned to theme
An important research development of the last decade has been the affirmation of a strong link between the financial system of a nation and the performance of that economy. Starting with King and Levine (1993), the research has generally found that countries with better financial systems tend to have a faster economic growth. However, it is still not completely clear how the exact transmission mechanism works from the financial system to real activity. Schumpeter (1912) argues that well-functioning banks spur technological innovation by identifying and funding those entrepreneurs with best chances of successfully implementing innovative products and production processes. More recently, Greenwald, Levinson and Stiglitz (1993) and Faini, Galli, and Giannini (1993) study that especially local banks play a crucial role for regional development since they have superior information on local investment opportunities than outsiders. Similarly, Samolyk (1994) empirically shows that local banking sector conditions explain real income growth at state level in US where bank loan quality has been poorer than in those states with relatively healthy banking conditions. In this paper, we study the spatial relationship between financial intermediation and economic growth at province level in Turkey. Considering the scarcity of accessing to the equity markets in Turkey, banks play the major role in regional growth by providing funds to businesses that needs financing. We aim to explore the spatial dimension of the financial development in Turkey and test whether any excess of regional funds is mobilized efficiently through banking intermediation. In the analysis, economic development is measured with the growth rate of the GDP at the province level. We study the impact of service efficiency of banks (deposits collected per branch) and loan supply on the inter-regional and intra-regional development controlling for several characteristics of provinces for the period between 1990 and 2002.
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