Financial development is widely recognised as important for economic growth and
development . Using data from the Vietnamese Enterprise Survey, we test the impact
of financial sector depth, state interventionism, and the degree of market financing
on firms’ reliance on internal funds and how much they invest. We find that financial
development decreases the external finance premium and thus stimulates investment.
A considerable body of academic research highlights the role of finance in fostering
economic growth and development (see Levine 2005 for a review). Theoretical
models suggest that financial development should improve investment outcomes and
capital allocation, improve monitoring and governance, improve risk management, and
increase trade.
On the basis of this research, many emerging market economies and developing
countries have been advised to liberalise financial markets and reduce government
control in the banking sector. However, since the recent global financial crisis, a
somewhat more hesitant view of the benefits of financial liberalisation has emerged
(Andersen et al. 2013). This is especially salient in the context of delivering growth
with financial stability.
Given these considerations in an emerging market context, it is important to explore
the relationship between finance and the real economy in settings where both better
outcomes and financial stability have been broadly achieved.