How does banking sector development foster innovation? New empirical evidence from the Asia region

Purpose This study aims to examine the pivotal role of banking sector development (BSD) in shaping innovation performance across Asian economies. Design/methodology/approach The analysis uses panel data from Asian economies spanning the period from 2000 to 2024. Key innovation indicators include research and development (R&D) expenditure intensity and the number of trademark applications. Advanced econometric techniques, i.e. system generalized method of moments, robust least squares and panel Granger causality models, are used to ensure robust empirical assessment. Findings The results indicate a positive and statistically significant relationship between BSD and innovation performance. Economic growth and remittance inflows also enhance innovation, whereas foreign direct investment inflows, inflation and real interest rates exert negative effects. The findings suggest that the banking sector plays a pivotal “grease the wheel” role in promoting innovation. Practical implications Policymakers are advised to increase the share of bank lending dedicated to R&D and innovation-focused activities to bolster economic progress and global competitiveness. Originality/value This research offers novel empirical insights into the BSD–innovation nexus within the Asian context. It contributes to the literature by highlighting how financial sector dynamics shape innovation outcomes in developing and emerging economies.

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