The ICT environment, financial sector and economic growth: a cross-country analysis

Purpose - The purpose of this paper is to test the hypothesis that, given the financial development of an economy (whether developed or not), e-finance technologies enhance economic growth because they lower processing costs for suppliers and information costs for consumers and therefore increase availability of finance for even low-income borrowers of remote areas. Design/methodology/approach - To analyze the indirect relationship between the level of connectivity and economic growth via its impact on financial development, generalized method of moments (GMM) is applied to cross section data of 61 countries averaged over 13 years (1990-2002). Findings - In all the regression results, it is found that better connectivity particularly by increasing the number of mobile phone subscribers and the number of internet users significantly enhances financial depth, which is a backbone of any country to grow. Practical implications - Based on the empirical findings of current study, it can be concluded that Claessens et al. might be right in saying that for developing countries to exploit opportunities for leapfrogging even with weak financial system, it is important to invest in the sector of information and communication technology. Originality/value - the current study is the first of its kind, which provides empirical and global evidence that the component of financial sector developed by better telecommunication infrastructure is positively associated with long run economic growth and gross capital formation.