Is Schumpeter Right?

Fintech and Economic

Growth
Serhan Cevik

WP/24/20

2024
FEB
© 2024 International Monetary Fund WP/24/20

IMF Working Paper

European Department

Is Schumpeter Right? Fintech and Economic Growth

Prepared by Serhan Cevik1

Authorized for distribution by Bernardin Akitoby

February 2024

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments
and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do
not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Abstract
The rise of fintech is revolutionizing the financial landscape, with products and companies
advancing innovative technologies to improve and automate financial services. In this paper, I use
a novel dataset and implement a dynamic modelling to investigate the relationship between fintech
and economic growth in a panel of 198 countries over the period 2012–2020. This cross-country
approach—utilizing direct measures of fintech and dealing with potential endogeneity—provides
interesting empirical insights. First, the impact magnitude and statistical significance of fintech on
real GDP per capita growth depend on the type of instrument (digital lending vs. digital capital
raising). While digital lending has a statistically significant positive effect on economic growth,
digital capital raising has a large but insignificant effect. Second, the overall impact of fintech
including all instruments is positive and statistically significant because of the overwhelming share
of digital lending in total. Finally, while the positive relationship between fintech and growth is
stronger in magnitude in advanced economies, the statistical significance of this effect is higher in
developing countries. Taken as a whole, these results confirm Schumpeter’s prediction that
financial innovation can promote growth, but not every type of fintech becomes an accelerator.

JEL Classification Numbers: E44; D82; G15; G21; O16; O40; O47

Keywords: Fintech; financial development; financial innovation; growth

Author’s E-Mail Address: [email protected]

1The author would like to thank German Villegas Bauer, Jeanne Verrier and Camila Viegas-Lee for helpful
comments and suggestions, and Can Ugur for excellent research assistance.
 3

I. INTRODUCTION

The rise of fintech is revolutionizing the financial landscape across the globe, with products and
companies advancing innovative technologies to improve and automate traditional financial
services. The total value of start-up investments into fintech worldwide increased from US$1
billion in 2008 to US$247 billion in 2022 (Figure 1). There is no doubt that fintech has the
transformative power to make financial systems more efficient and broaden financial inclusion to
the under-served populations. Fintech can therefore boost economic growth through
technological and financial innovation that reduce the cost of financial services, moderate risks
associated with financial transactions, and thereby increase financial intermediation.

There is a large literature that explores how financial development and innovation affects
economic growth, going back to the pioneering work of Schumpeter (1912) followed by
Greenwood and Jovanovic (1990), Bencivenga and Smith (1991), King and Levine (1993a, 1993b)
and Rajan and Zingales (1998). Instead of reexamining each aspect of this literature in detail, it is
more effective to feature key contributions that are particularly pertinent to the analysis
presented in this paper. Fisman and Love (2007) point out that industries with higher growth
opportunities grow faster in countries with higher levels of financial development. Likewise,
Laeven, Levine, and Michalopoulos (2015) show that financial innovation boosts economic
growth, specifically through better utilization of growth opportunities. However, it is important to
emphasize that not all episodes of financial development and innovation promote economic
growth. Excessive credit growth and new financial products can instigate financial instability,
especially when banks and investors accumulate too much leverage and neglect tail risks (Allen
and Carletti, 2006; Rajan, 2006; Shleifer and Vishny, 2010; Gennaioli, Shleifer, and Vishny, 2012;
Thakor, 2012; Beck et al., 2016). Another strand of the literature in this context focuses on
whether there is a nonlinear relationship between financial development and economic growth
and finds that more finance could be associated with less growth (Rousseau and Wachtel, 2011;
Cecchetti and Kharroubi, 2012; Law and Singh, 2014; Arcand, Berkes, and Panizza, 2015; Swamy
and Dharani, 2019; Zhu, Asimakopoulos, and Kim, 2020).

Figure 1. Fintech Across the World

Fintech Investments Number of FinTech Start-ups
(USD billions) 30000
300 Americas EMEA APAC
25000
250

20000
200

150 15000

100 10000

50 5000

0
0
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2018 2019 2020 2021 2023

Source: KPMG; BCG; CrunchBase; Statista; author’s calculations.

 4

But is fintech really an engine of growth as Schumpeter argued? Studies focusing on the
empirical links between fintech and economic growth remain scarce, mainly because of cross-
country data constraints. Measuring the contribution of fintech indirectly by the number of
automated teller machines (ATMs) and mobile phone subscriptions, Kanga et al. (2021) find a
positive effect on per capita income growth in a panel of 137 countries during the period 1991–
2015. Other studies, using mostly subnational data on fintech transactions in China, find a
statistically significant positive association between fintech and economic growth (Li, Wu, and
Xiao, 2019; Zhang et al., 2020; Chen, Teng, and Chen, 2022; Song and Appiah-Otoo, 2022; Bu, Yu,
and Li, 2023). While financial deepening and innovation can mobilize savings and provide
funding for growth opportunities in the real economy, it is important not to ignore the effect of
fintech on financial stability, which in turn may have adverse consequences for economic
growth.2

This study contributes to the literature by using a novel dataset of direct measures of fintech and
implementing a dynamic modelling to investigate the empirical relationship between fintech and
economic growth in a panel of 198 countries over the period 2012–2020. Dealing with potential
endogeneity, the dynamic analysis via the system generalized method of moments (GMM)
approach provides interesting insights into the relationship between fintech and economic
growth across countries and over time. First, the impact magnitude and statistical significance of
fintech on real GDP per capita growth depend on the type of instrument (digital lending vs.
digital capital raising). While digital lending as a share of GDP has a statistically significant
positive effect on economic growth, digital capital raising as a share of GDP has a large but
statistically insignificant effect. Second, the overall impact of fintech including all instruments is
positive and statistically significant because of the overwhelming share of digital lending in total.

Figure 2. Fintech and Economic Growth

Source: CCAF; World Bank; author’s calculations.

2There is also a small but growing literature on the effect of fintech on financial stability, with mixed results
whether it is a threat or opportunity (Minto, Voelkerling, and Wulff, 2017; Pantielieieva et al., 2018; Fung et al.,
2020; Pierri and Timmer, 2020; Vucinic, 2020; Feyen et al., 2021; Daud et al., 2022; Nguyen and Dang, 2022; Cevik,
2023).
 5

In other words, an increase in fintech is associated with an increase in economic growth, after
controlling for other factors including the lagged dependent variable. This pattern of findings
remains intact when I estimate the model separately for advanced economies and developing
countries, albeit at varying degrees of significance. While the positive relationship between
fintech and economic growth is stronger in magnitude in advanced economies, the statistical
significance of this effect is higher in developing countries. Taken as a whole, these results
confirm the Schumpeterian prediction that financial innovation can promote economic growth
by increasing financial intermediation and providing financial resources for fixed capital
formation, but not every type of fintech becomes an accelerator.

Fintech is still small compared to traditional financial institutions, but the analysis presented in
this paper finds that fintech could have significant effects on economic growth. While the
magnitude of this effect depends on the type of fintech instrument, the overall impact still
appears to be statistically significant, even at this stage with the average volume of fintech
instruments amounting to 0.1 percent of GDP, compared to 55 percent of GDP in domestic credit
to the private sector. Looking forward, therefore, fast-growing and evolving fintech should have
a greater effect on economic growth, especially with increasing adaptation by large established
institutions and big-tech companies. In this context, maintaining financial stability is sine qua non
for sustainable growth and that requires strong regulatory institutions, better use of technology
in regulation, extensive cross-border coordination and appropriately calibrated prudential
regulations for a level playing field and effective monitoring and supervision of traditional and
emerging financial institutions (Arner et al., 2017; He et al., 2017; Magnuson, 2018; Boot, et al.,
2021; Adrian et al., 2023; Bains and Wu, 2023).

The remainder of this paper is structured as follows. Section II provides an overview of the data
used in the empirical analysis. Section III describes the econometric methodology and presents
the findings. Finally, Section IV summarizes and provides concluding remarks.

II. DATA OVERVIEW

The empirical analysis presented in this paper is based on an unbalanced panel dataset of annual
observations covering 198 countries over the period 2012–2020. The dependent variable is
economic growth as measured by annual real GDP per capita growth rate and gross fixed capital
formation as a share of GDP, which are drawn from the World Bank’s World Development
Indicators (WDI) database. The key explanatory variable of interest in this analysis is the volume
of fintech transactions (excluding cryptocurrencies) as a share of GDP. The primary fintech data is
obtained from the Cambridge Centre for Alternative Finance (CCAF) database that covers more
than 4,400 fintech entities across the world and divides fintech developments into two main
categories: (i) digital lending and (ii) digital capital raising (CCAF, 2021; Ran, Rau, and Ziegler,
2022). Fintech refers to the use of technology to deliver financial services and products,
encompassing a wide range of innovations and business models that aim to improve and
automate traditional financial products and processes. In this paper, however, I use measures of
alternative finance from the CCAF dataset, which consist of financial channels and instruments
outside of the traditional finance system as described in detail at https://ccaf.io/. Digital lending
 6

is the volume of lending instruments through digital platforms, including balance sheet lending,
peer-to-peer and marketplace lending, debt-based lending, and invoice trading. Digital capital
raising refers to the volume of capital raising instruments through digital platforms, including
investment-based crowdfunding such as real estate crowdfunding, and non-investment-based
crowdfunding such as donation-based or reward-based crowdfunding. To have a broad measure
of fintech developments, I combine digital lending and digital capital raising with other types of
fintech (such as micro finance and pension-led funding) and scale it by GDP.3

To control for the influence of other demographic and economic variables associated with
economic development, I introduce an array of variables, including the level of real GDP per
capita, consumer price inflation, trade openness as measured by the share of exports and
imports in GDP, financial development as measured by domestic credit to the private sector as a
share of GDP, government size measured by government spending as a share of GDP, population
growth, and educational attainments as measured by the share of labor force with basic
education, which are obtained from the WDI database. Institutional and political factors are also
found to be critical for growth dynamics and thereby I include government stability and
bureaucratic quality as measured by composite indices constructed by the International Country
Risk Guide (ICRG) as additional control variables.

Descriptive statistics for the variables used in the empirical analysis are provided in Table 1. There
is a great degree of dispersion across countries and over time in terms of economic growth. The
mean value of real GDP per capita growth is 2.2 percent over the sample period, but it shows
significant variation from a minimum of -54 percent to a maximum of 87 percent. To mitigate the
effects of extreme outliers, the dataset is winsorized at 5th and 95th percentiles. The main

Table 1. Summary Statistics

Variable Observations Mean Std. dev. Minimum Maximum
Real GDP growth 1,738 2.2 5.9 -54.2 86.8
Gross fixed capital formation 1,485 23.1 8.0 1.4 78.0
Fintech
Digital lending 594 0.1 0.3 0.0 3.4
Digital capital raising 1,093 0.0 0.0 0.0 0.5
Total 1,118 0.1 0.2 0.0 3.4
Real GDP per capita 1,738 13,706 18,765 263 167,809
Inflation 1,620 5.3 21.1 -4.3 557.2
Trade openness 1,581 90.9 58.4 10.0 442.6
Domestic credit to the private sector 1,528 55.0 43.5 1.1 258.9
Government spending 1,517 17.1 8.6 3.6 84.2
Population growth 1,773 1.3 1.4 -6.9 11.8
Educational attainments 944 47.8 17.0 12.6 100.0
Government stability 1,242 7.1 1.1 4.0 11.0
Bureaucratic quality 1,242 2.2 1.1 0.0 4.0
Source: CCAF; World Bank; author's calculations.

3 The CCAF dataset excludes mobile money and internet banking, which are also operated by traditional financial
institutions.
 7

explanatory variable of interest is fintech, measured by (i) digital lending, (ii) digital capital raising
and (iii) total including all fintech instruments as a share of GDP. These fintech measures exhibit
substantial cross-country heterogeneity during the sample period. With an upward trend in the
amount of fintech transactions, the mean value of digital lending is 0.1 percent of GDP with a
minimum of nil and a maximum of 3.4 percent. Likewise, the volume of digital capital raising as a
share of GDP ranges from a minimum of nil to a maximum of 0.5 percent, with a mean value
close to 0 percent over the sample period. Other explanatory variables show analogous patterns
of considerable variation across countries, highlighting the importance of economic and
institutional differences.

III. EMPIRICAL STRATEGY AND RESULTS

The empirical objective of this paper is to investigate the impact of fintech (excluding
cryptocurrencies) on economic growth in a large panel of 198 countries over the period 2012–
2020. Taking advantage of the panel structure in the data, I estimate the following baseline
specification:

𝑦𝑖𝑡 = 𝛽1 + 𝛽2 𝑓𝑖𝑛𝑡𝑒𝑐ℎ𝑖𝑡 + 𝛽3 𝑋𝑖𝑡 + 𝜂𝑖 + 𝜇𝑡 + 𝜀𝑖𝑡

where 𝑦𝑖𝑡 denotes real GDP per capita growth or gross fixed capital formation as share of GDP in
country i and time t; 𝑓𝑖𝑛𝑡𝑒𝑐ℎ𝑖𝑡 represents (i) digital lending as a share of GDP, (ii) digital capital
raising as a share of GDP, or (iii) all fintech instruments as a share of GDP; 𝑋𝑖𝑡 represents a vector
of control variables including the logarithm of real GDP per capita at time t-1, consumer price
inflation, trade openness, domestic credit to the private sector, government size, population
growth, educational attainments, and measures of government stability and bureaucratic quality.
The 𝜂𝑖 and 𝜇𝑡 coefficients denote the time-invariant country-specific effects and the time effects
controlling for common shocks that may affect economic growth across all countries in a given
year, respectively. 𝜀𝑖𝑡 is the idiosyncratic error term. I account for possible heteroskedasticity,
autocorrelation and cross-sectional dependence within the data by using the Driscoll-Kraay
(1998) standard errors, which are particularly robust in an unbalanced panel with a shorter time
dimension.

Endogeneity is an important concern in this context. That is, there might be greater demand for
fintech in fast-growing economies, potentially causing reverse causality, which makes the
parameter estimates biased and inconsistent. Although the best approach to alleviate this
concern is to use the instrumental variable (IV) estimation, identifying a suitable time-varying IV
for various fintech instruments is not feasible. Therefore, to ensure the robustness of the
empirical analysis, I implement the system GMM approach proposed by Arellano and Bover
(1995) and Blundell and Bond (1998), which allows for the inclusion of the lagged dependent
variable as a regressor and controls for potential endogeneity of all explanatory variables,
including fintech measures.

The system GMM method involves constructing two sets of equations, one with first differences
of the endogenous and pre-determined variables instrumented by suitable lags of their own
levels, and one with the levels of the endogenous and pre-determined variables instrumented
 8

with suitable lags of their own first differences. I apply the one-step version of the system GMM
estimator to ensure the robustness of the results, as the standard errors from the two-step
variant of the system GMM method are shown to have a downward bias in the panels with small
number of time-series observations.

The use of all available lagged levels of the variables in the system GMM estimation leads to a
proliferation in the number of instruments, which reduces the efficiency of the estimator in finite
samples, and potentially leads to over-fitting. A further issue is that the use of a large number of
instruments significantly weakens the Hansen J-test of over-identifying restrictions, and so the
detection of over-identification is hardest when it is most needed. Conversely, however,
restricting the instrument set too much results in a loss of information that leads to imprecisely
estimated coefficients. Estimation of such models therefore involves a delicate balance between
maximizing the information extracted from the data on the one hand and guarding against over-
identification on the other. I follow the strategy suggested by Roodman (2009) to deal with the
problem of weak and excessively numerous instruments. The system GMM identification
assumptions are also validated by applying a second-order serial correlation test for the residuals
and the Hansen J-test for the overidentifying restrictions. The values reported for AR(1) and AR(2)
are the p-values for first- and second-order autocorrelated disturbances in the first-differenced
equation. As expected, I find that there is high first-order autocorrelation, but no evidence for
significant second-order autocorrelation. Similarly, the Hansen J-test result indicate the validity of
internal instruments used in the dynamic model estimated via the system GMM approach.4

The empirical analysis provides interesting insights into the relationship between fintech and
economic growth across countries and over time. The static estimations, presented in Table 2,
show that the magnitude and statistical significance of fintech varies according to the type of
instrument (digital lending vs. digital capital raising) when the model with control variables is
estimated for the entire sample of countries. To obtain a better understanding of how the level
of economic development influences the impact of fintech on real GDP per capita growth, I also
estimate the model separately for different income groups—advanced economies and
developing countries.5 Even with a lower number of observations in country subsamples, this
disaggregation reveals important differences in how fintech developments affect economic
growth in advanced and developing economies. First, the estimated coefficient on the volume of
digital lending as a share of GDP in column [1] has a statistically and economically significant
positive effect (at the 10 percent level) on economic growth in advanced economies, whereas it
remains much smaller and statistically insignificant in developing countries. As a result, the
growth impact of fintech turns out to be negligible for the sample as a whole at conventional
levels. Second, the estimated coefficient on the volume of digital capital raising as a share of GDP
in column [2] is much greater in magnitude, but statistically still insignificant. Interestingly, this
impact of digital capital raising on economic growth is positive in advanced economies, but
negative in the case of developing countries. Finally, the static estimations presented in Table 2

4All variables except the lagged dependent variable are treated as exogenous. The lagged dependent variable is
specified as an instrument due to a potential endogeneity issue, with all available lags used as instruments.
5 As an additional robustness check, I estimate the model for the pre-pandemic period and obtain similar results.
 9

show that the overall effect of fintech (including all instruments) remains statistically insignificant
across all specifications.

However, as discussed above, the static estimations in this context are vulnerable to endogeneity.
The dynamic estimations via the system GMM approach, presented in Table 3, reveal striking
differences in how fintech affects economic growth. First, for the sample as a whole, the
estimated coefficient on digital lending as a share of GDP in column [1] has a statistically and
economically significant positive effect (at the 1 percent level) on real GDP per capita growth. In
other words, an increase in digital lending is associated with an increase in economic growth,
after controlling for other factors including the lagged dependent variable. Second, the
estimated coefficient on digital capital raising as a share of GDP in column [2] is substantially
greater in magnitude, but it remains statistically insignificant. Third, the overall impact of fintech
including all instruments in column [3] is positive and statistically significant, thanks to the
overwhelming share of digital lending in the total amount of fintech instruments. This pattern of
empirical findings remains intact when I estimate the dynamic model separately for advanced
economies and developing countries. While the positive relationship between fintech and
economic growth is stronger in magnitude in advanced economies, the statistical significance of
this effect is higher in developing countries.

Table 2. Fintech and Economic Growth: Static Estimations

All AE EM
[1] [2] [3] [1] [2] [3] [1] [2] [3]
Digital lending 0.406 1.943* 0.100
[0.329] [1.391] [0.427]
Digital capital raising 9.805 17.515 -33.076
[8.621] [11.700] [29.223]
Total fintech 0.789 1.308 0.453
[0.323] [0.796] [0.376]
Real GDP per capita t-1 -12.802** -9.936*** -9.539*** -9.148 -10.427 -7.193 -18.120*** -9.563*** -10.252***
[4.121] [3.803] [3.783] [4.514] [4.130] [4.951] [4.469] [2.540] [2.631]
Inflation -0.047 -0.077*** -0.076*** 0.031 0.159 0.070 -0.132*** -0.061*** -0.062***
[0.041] [0.006] [0.006] [0.173] [0.081] [0.133] [0.021] [0.005] [0.005]
Trade openness 0.054 0.063* 0.059* 0.027 0.019 0.023 0.121** 0.105*** 0.100***
[0.030] [0.023] [0.022] [0.019] [0.014] [0.011] [0.040] [0.030] [0.031]
Financial development -0.022 -0.009 -0.015 -0.011 -0.004 -0.009 -0.070** -0.037 -0.037
[0.008] [0.005] [0.006] [0.009] [0.003] [0.006] [0.023] [0.016] [0.019]
Government spending -1.525*** -1.015*** -0.989*** -1.667*** -1.573*** -1.556*** -1.283*** -0.613*** -0.622***
[0.180] [0.219] [0.225] [0.157] [0.181] [0.218] [0.305] [0.170] [0.174]
Population growth 1.765*** 0.630*** 0.609*** 1.053*** 0.883*** 0.822** 2.440** 0.407*** 0.422***
[0.442] [0.082] [0.091] [0.209] [0.247] [0.235] [0.321] [0.118] [0.128]
Educational attainments 0.022 0.007 0.007 0.005 0.013 0.006 0.060 0.011 0.006
[0.012] [0.019] [0.020] [0.009] [0.021] [0.016] [0.028] [0.024] [0.021]
Government stability 0.136 0.149 0.144 0.090 0.075 0.102 0.258 0.222 0.208
[0.080] [0.090] [0.091] [0.095] [0.061] [0.066] [0.151] [0.130] [0.127]
Bureaucratic quality 0.254 1.295 1.271 0.980 0.587 1.353 0.032 1.107 1.021
[0.665] [0.642] [0.686] [1.596] [1.588] [1.658] [0.509] [0.631] [0.610]
Number of observations 358 519 530 32 218 223 174 301 307
Number of countries 84 99 100 32 33 33 52 66 67
Country FE Yes Yes Yes Yes Yes Yes Yes Yes Yes
Time FE Yes Yes Yes Yes Yes Yes Yes Yes Yes
2
R 0.49 0.39 0.38 0.58 0.57 0.52 0.48 0.36 0.36

Note: The dependent variable is real GDP per capita growth. Driscoll-Kraay standard errors are reported in brackets. *, **, and *** denote
significance at the 10%, 5%, and 1% levels, respectively.
Source: Author's estimations.
 10

With regards to control variables, I obtain consistent and intuitive estimation results. The level of
real GDP per capita is inversely correlated with economic growth, confirming the income
convergence hypothesis. Inflation appears to have a negative association with growth, especially
in developing countries, while trade openness—a measure of international economic integration
and development—has a positive effect that is statistically significant only in developing
countries. The overall level of financial development as measured by domestic credit to the
private sector as a share of GDP has a negative coefficient across all specifications, but it is not
statistically significant. Government size as measured by government spending as a share of
GDP, on the other hand, has a statistically significant negative effect on growth in developing
countries. Demographic factors, as proxied by population growth and educational attainments,
make positive contributions to real GDP per capita growth, while institutional and political
variables have the expected effects on economic growth, but not in a statistically significant way.

Finally, to explore the mechanisms through which fintech contributes to economic growth, I
estimate the dynamic model via the system GMM approach for gross fixed capital formation as a
share of GDP. These results, presented in Table 4, show that the total volume of fintech

Table 3. Fintech and Economic Growth: Dynamic Estimations

All AE EM
[1] [2] [3] [1] [2] [3] [1] [2] [3]
Real GDP per capita growth t-1 0.354*** 0.429*** 0.439*** 0.237*** 0.308*** 0.300*** 0.184*** 0.394* 0.416**
[0.039] [0.095] [0.099] [0.054] [0.091] [0.084] [0.061] [0.144] [0.145]
Digital lending 0.849*** 1.909* 0.796***
[0.176] [0.785] [0.213]
Digital capital raising 17.610 14.627 41.307
[9.039] [9.074] [26.942]
Total fintech 0.718*** 2.089** 0.582***
[0.183] [0.690] [0.172]
Real GDP per capita t-1 -0.459*** -0.358* -0.379* -0.484 -1.095 -0.939 -0.824* -0.325 -0.396
[0.074] [0.148] [0.148] [0.780] [0.528] [0.499] [0.074] [0.195] [0.186]
Inflation -0.112** -0.049*** -0.049*** -0.266 -0.275 -0.296* -0.086 -0.049*** -0.049***
[0.038] [0.007] [0.007] [0.137] [0.129] [0.110] [0.035] [0.005] [0.005]
Trade openness 0.002 0.002 0.002 0.002 0.003 0.003 0.011 0.011* 0.010*
[0.002] [0.002] [0.002] [0.001] [0.001] [0.001] [0.006] [0.004] [0.004]
Financial development -0.003 -0.002 -0.003 -0.005 -0.003 -0.003 -0.001 -0.002 -0.002
[0.004] [0.004] [0.003] [0.006] [0.005] [0.005] [0.006] [0.004] [0.004]
Government spending -0.094 -0.080 -0.078 -0.066 -0.052 -0.042 -0.225** -0.175*** -0.166***
[0.040] [0.033] [0.032] [0.055] [0.046] [0.049] [0.071] [0.052] [0.050]
Population growth 0.138*** 0.158* 0.176* 0.668** 0.592** 0.613** 0.029 0.168 0.184
[0.114] [0.065] [0.072] [0.217] [0.202] [0.182] [0.144] [0.070] [0.075]
Educational attainments 0.017 0.013 0.012 0.002 0.009 0.010 0.033** 0.021* 0.021*
[0.008] [0.007] [0.007] [0.007] [0.011] [0.011] [0.011] [0.008] [0.008]
Government stability 0.145 0.234*** 0.221*** 0.127 0.189 0.186 0.028 0.219 0.205
[0.091] [0.067] [0.068] [0.093] [0.080] [0.081] [0.163] [0.099] [0.097]
Bureaucratic quality 0.385 0.251 0.324 0.011 0.383 0.398 0.231 0.050 0.001
[0.195] [0.159] [0.156] [0.344] [0.323] [0.299] [0.265] [0.192] [0.189]
Number of observations 352 510 518 182 214 218 170 296 300
Number of countries 84 99 100 32 33 33 52 66 67
Country FE Yes Yes Yes Yes Yes Yes Yes Yes Yes
Time FE Yes Yes Yes Yes Yes Yes Yes Yes Yes
Spefication tests (p values)
AR(1) 0.005 0.000 0.000 0.003 0.004 0.001 0.004 0.000 0.000
AR(2) 0.217 0.425 0.317 0.614 0.342 0.291 0.209 0.735 0.686
Hansen J-test 0.267 0.369 0.363 0.992 0.849 0.802 0.285 0.599 0.467

Note: The dependent variable is real GDP per capita growth. Robust standard errors are reported in brackets. *, **, and *** denote significance at
the 10%, 5%, and 1% levels, respectively.
Source: Author's estimations.
 11

transactions, similar to financial development in general, affects growth through its contribution
to physical capital accumulation. Fintech has a statistically significant positive association with
gross fixed capital formation, but the direction of this effect varies when I estimate the model
separately for income groups. While its impact is positive in advanced economies, it appears to
be negative in developing countries, which may reflect the infancy and volatility of fintech at this
stage of its development.

Table 4. Fintech and Fixed Investment: Dynamic Estimations

All AE EM
[1] [2] [3]
Gross fixed capital formation t-1 0.854*** 0.700*** 0.790***
[0.145] [0.136] [0.134]
Total fintech 0.322*** 0.566*** -0.680***
[0.091] [0.115] [0.204]
Real GDP per capita t-1 -0.019* 0.560 -0.124
[0.006] [0.977] [0.340]
Inflation -0.051** 0.169 -0.052**
[0.018] [0.125] [0.018]
Trade openness 0.001 -0.002 0.005
[0.002] [0.003] [0.007]
Financial development 0.004 -0.007 0.004
[0.003] [0.006] [0.003]
Government spending -0.025 -0.060 -0.055
[0.041] [0.078] [0.066]
Population growth 0.085* 0.077 0.168*
[0.017] [0.104] [0.035]
Educational attainments 0.009 0.001 0.014
[0.011] [0.001] [0.016]
Government stability 0.022*** 0.059 0.100***
[0.007] [0.126] [0.015]
Bureaucratic quality 0.369* 0.085 0.261*
[0.137] [0.596] [0.032]
Number of observations 533 228 305
Number of countries 96 32 64
Country FE Yes Yes Yes
Time FE Yes Yes Yes
Spefication tests (p values)
AR(1) 0.002 0.003 0.005
AR(2) 0.335 0.225 0.584
Hansen J-test 0.474 0.931 0.348

Note: The dependent variable is gross fixed capital formation as a share of

GDP. Robust standard errors are reported in brackets. *, **, and *** denote
significance at the 10%, 5%, and 1% levels, respectively.
Source: Author's estimations.
 12

IV. CONCLUSION

Fintech is changing the financial landscape across the world, with a new range of products and
companies using innovative technologies to improve and automate financial services. There is no
doubt that fintech has the transformative potential to make financial systems more efficient and
broaden financial inclusion. But has it really become an engine of economic growth as
Schumpeter predicted in 1912? There is a large literature that explores how financial
development and innovation affects economic growth, but it should also be noted that excessive
credit growth and new financial products can instigate financial instability and consequently
undermine growth dynamics. Furthermore, studies focusing on the relationship between fintech
and economic growth remain scarce, mainly because of cross-country data constraints.

This study uses a novel dataset of direct measures of fintech and implements a dynamic
modelling to analyze the empirical relationship between fintech and real GDP per capita growth
rates in a panel of 198 countries over the period 2012–2020. Dealing with potential endogeneity,
the dynamic analysis based on the system GMM method provides interesting insights into the
links between fintech and economic growth across countries and over time. First, the impact
magnitude and statistical significance of fintech on real GDP per capita growth depend on the
type of instrument (digital lending vs. digital capital raising). While digital lending as a share of
GDP has a statistically significant positive effect on economic growth, digital capital raising as a
share of GDP has a large but statistically insignificant effect. Second, the overall impact of fintech
including all instruments is positive and statistically significant because of the overwhelming
share of digital lending in total. In other words, an increase in fintech is associated with an
increase in economic growth, after controlling for other factors including the lagged dependent
variable. This pattern of findings remains intact when I estimate the model separately for
advanced economies and developing countries, albeit at varying degrees of significance. While
the positive relationship between fintech and economic growth is stronger in magnitude in
advanced economies, the statistical significance of this effect is higher in developing countries.
Taken as a whole, these results confirm the Schumpeterian prediction that financial innovation
can promote economic growth by increasing financial intermediation and providing financial
resources for fixed capital formation, but not every type of fintech becomes an accelerator.

Fintech remains small compared to traditional financial institutions, but the analysis presented in
this paper shows that fintech can still have significant growth effects. While the magnitude of this
effect depends on the type of fintech instrument, the overall impact is statistically significant,
even at this stage with the average volume of fintech instruments amounting to 0.1 percent of
GDP, compared to 55 percent of GDP in domestic credit to the private sector. Looking forward,
therefore, fast-growing fintech is likely to have a greater effect on economic growth. In this
context, maintaining financial stability is sine qua non for sustainable growth and that requires
strong regulatory institutions, better use of technology in regulation, extensive cross-border
coordination and appropriately calibrated prudential regulations for a level playing field and
effective monitoring and supervision of traditional and emerging financial institutions.
 13

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