Economics
Financial Innovation
Financial innovation refers to the development and implementation of new financial products, services, and processes. It aims to create more efficient and effective ways of managing financial resources, reducing risks, and increasing returns. Examples include the introduction of new financial instruments, such as derivatives, and the use of technology to improve financial transactions and services.
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10 Key excerpts on "Financial Innovation"
- Josh Lerner, Scott Stern, Josh Lerner, Scott Stern(Authors)
- 2012(Publication Date)
- University of Chicago Press(Publisher)
We then consider three case studies of particular innova-tions and highlight both what is known and unknown about their conse-quences. The original Rate and Direction volume was published in 1962. Just two years later, Robert W. Fogel, a future Nobel laureate in economics, pub-lished his masterpiece Railroads and American Economic Growth. In it, Fogel advanced a method, now used in history, political science, and economic history, to consider counterfactual histories. In a counterfactual analysis, the researcher (a) posits a set of plausible counterfactuals and how they might have come to pass; and (b) evaluates metrics to establish the implications of these alternative historical paths. We suggest how this method, while seemingly imprecise and controversial, can be used to better understand Financial Innovation. We also discuss the limitations of this method. In our conclusion, we suggest avenues for future exploration. 11.1 Background on Financial Innovation Much of the theoretical and empirical work in financial economics con-siders a highly stylized world in which there are few types of securities (e.g., debt and equity) and a handful of simple financial institutions, such as banks or exchanges. In reality there are a vast range of di ff erent financial products, many di ff erent types of financial institutions, and a variety of processes that these institutions employ to do business. The literature on financial innova-tion must grapple with this real-world complexity. Financial Innovation is the act of creating and then popularizing new financial instruments, as well as new financial technologies, institutions, and markets. The innovations are sometimes divided into product or process variants, with product innovations exemplified by new derivative contracts, new corporate securities, or new forms of pooled investment products, and process improvements typified by new means of distributing securities, pro-
eBook - ePub- Elena Beccalli, Federica Poli(Authors)
- 2015(Publication Date)
- Palgrave Macmillan(Publisher)
The features of innovation in the banking sector are quite different from the characteristics usually encountered in other sectors. First, and in contrast to innovation in the manufacturing sector, a unique definition of Financial Innovation can be hardly found. For Frame and White (2004), Financial Innovation is defined as product and organizational innovation, which allows cost or risk reduction for the single bank and/or an improvement of the services for the financial system as a whole, but other definitions have been proposed as well. Second, banks are not the only developer of Financial Innovation. The banking sector is also an end user of innovations developed in other sectors. Sometimes, banks jointly develop innovation with non-financial firms, such as software houses or specialized technology firms. Very often, innovation happens thanks to interaction with clients, and so is spread over departments.Because of these features, the measurement of Financial Innovation is quite a challenge. Our chapter is closely related to recent literature addressing the open question of how to measure Financial Innovation. Studies of manufacturing innovation traditionally focus on research and development (R&D) spending. However, R&D is unlikely to be a satisfactory measure in banking, since banks do not usually have an R&D department that launches new products and services. Most new services are developed in an incremental way, often through ‘trial and error’ and in all parts of the business.A count based on the listings of new securities is not fully satisfactory either, since much of the innovation in financial services is not related to publicly traded securities, such as insurance and banking products (Lerner and Tufano, 2011). Furthermore, new securities are often minor variants of existing securities, issued by banks to differentiate themselves from competitors. Some studies on innovation in the banking industry attempt to catalogue one particular type of innovation, such as credit default swaps or securitization (Tufano, 2003). However these results cannot be easily generalized to other products. A recent suggestion is to consider patents by financial institutions (Arnaboldi and Claeys, 2014; Hall et al. 2009; Hunt, 2008), but Boldrin and Levine (2013) point out that academic studies have typically failed to find much of a connection between patents, innovation and productivity growth.
eBook - PDFThe Banks Did It
An Anatomy of the Financial Crisis
- Neil Fligstein(Author)
- 2021(Publication Date)
- Harvard University Press(Publisher)
The creation of the mortgage securitiza-tion industry is a marvel of capitalist innovation. With the help of the govern-ment, banks took pragmatic action to solve difficult problems to produce a new industry with profits like no one had ever seen. What Is Financial Innovation? Robert Merton, the Nobel Prize–winning financial economist, suggests that “the primary function of a financial system is to facilitate the allocation and deploy-ment of economic resources, both spatially and across time, in an uncertain en-vironment. This function encompasses a payments system with a medium of exchange; the transfer of resources from savers to borrowers; the gathering of savings for pure time transformation (i.e., consumption smoothing); and the reduction of risk through insurance and diversification” (1992: 12). Frame and Financial Innovation and the Alphabet Soup of Financial Products the banks did it 108 White, also financial economists, define a Financial Innovation as “something new that reduces costs, reduces risks, or provides an improved product / ser-vice / instrument that better satisfies financial system participants’ demands” (2010: 4). There are two perspectives in the economic literature on the overall contri-bution of Financial Innovation to modern economies (Frame and White, 2010; Silber, 1983). One emphasizes the centrality of finance in an economy and its im-portance for economic growth (R. Levine, 1997). Since finance is a facilitator of virtually all production activity and much consumption activity, improvements in the financial sector are thought to have direct positive effects throughout an economy. In the case of the innovations surrounding mortgage securitization, scholars have noted that connecting capital markets to mortgage markets made the allocation of capital across the economy more efficient.
eBook - ePubContested Money
Toward a New Social Contract
- Matilde Massó(Author)
- 2023(Publication Date)
- Routledge(Publisher)
Most authors define Financial Innovation as the creation and diffusion of new financial products, processes, markets, and actors. However, Financial Innovation is much more than this. It transcends any narrow and linear definition of innovation that is limited to the oversimplified idea of deriving a technological application from a scientific discovery. It is, at the same time, a product and a process that involves multiple actors interacting in a complex development that ranges from the creation of new knowledge to its application and diffusion in a bidirectional process. This means that an ordered sequence of various stages does not exist. Innovations can be developed at any stage of the process and can be led by any of the participant actors:All aspects of a linear view of innovation have been criticized for several decades…. Nor is technological innovation simply the deduction of the implications of scientific discovery. Technologies may or may not draw upon science, and when they do they use it creatively as a resource rather than simply deducing its implications.(Mackenzie, 2009 , p. 32)Financial Innovation is fundamentally a co-performance process involving “actors in the wild,” particularly those in the social, cultural, and political context of day-to-day interactions (Mackenzie, 2009 , p. 69; Callon, 2007 ). In addition, the concept of co-performativity includes an important idea. It asserts that individuals and artifacts, that is, computers, pricing software, economic models, trading strategies, and regulatory structures, interact in a process of mutual learning and influence, in a recursive interaction performance.Financial Innovation involves the creation, promotion, and adoption of new instruments, products, platform procedures, and enabling technologies (Khraisha & Arthur, 2018 ). In this process, scientific knowledge that frequently comes from areas other than economics (fundamentally physics and mathematics), existing technology, the political context, and various categories of financial instruments and users interact in an embodied process of expertise (Mackenzie, 2009 ; Granovetter, 2005
- Ismail Ertürk, Daniela Gabor, Ismail Ertürk, Daniela Gabor(Authors)
- 2016(Publication Date)
- Routledge(Publisher)
Hence, it was financial economists like Merton Miller (1986) who explicitly coupled the terms ‘finance’ and ‘innovation’ in the 1980s to create a leading metaphor. Their linguistic coupling was foundational because it associated developments in financial products and markets with standard economic ideas about innovation as a process with positive outcomes. Innovation can create losers as well as winners, but the standard economic definition of innovation is as something that results in a higher level of economic welfare, through enhancing either static efficiency or dynamic efficiency. In effect, the metaphor was positively charged and imparted a bias in favour of Financial Innovation when, as Merton claimed, there was a lot of it about. Writing in the mid-1980s, Miller asked the question, ‘can any twenty-year period in recorded history have witnessed even a tenth as much new development?’ (Miller, 1986, p. 460). Later writers remind readers of Miller’s assertion that innovation cannot continue at the same pace and argue that it has indeed done so (Tufano, 2002).But what exactly was innovation and how did it generate beneficial outcomes? The connection between innovation and more economic growth is explicitly made in some of the financial economics literature: for example, Miller (1986) defines Financial Innovation as something that produces economic growth in excess of what would otherwise occur. However, the financial economists were theorists of efficient markets (not modellers of contributions to economic growth). The financial economists thus added a link in the argument and, as theorists of financial markets, defaulted onto the idea that Financial Innovation is everything that makes financial markets more efficient and extends the sphere of financial markets; which, prima facie, should deliver higher growth and welfare gains. By the 2000s, with the hockey-stick growth of derivatives and other instruments, this definition had crystallized into the idea that the project of Financial Innovation in our time was the marketization of risk. And this definition was taken up by many, including behavioural financial economists like Robert Shiller, who did not believe in efficient markets and rational actors. Shiller defines ‘radical Financial Innovation’ as ‘the development of new institutions and methods that permit risk management to be extended far beyond its former realm, covering important new classes
eBook - ePubStrategic Outlook in Business and Finance Innovation
Multidimensional Policies for Emerging Economies
- Hasan Dinçer, Serhat Yüksel, Hasan Dinçer, Serhat Yüksel(Authors)
- 2021(Publication Date)
- Emerald Publishing Limited(Publisher)
Tohidi & Jabbari, 2011 ). Therefore, all enterprises attempt to innovate for their survival and prosperity. However, in terms of the number and value of innovations, financial system is the leading sector. But the important question from the perspective of a nation and the society is “does any innovation in financial sector have any valuable impact on economic growth?”In order to make an evaluation about the nexus between Financial Innovation (FI) and economic growth, to stem the working process in financial system is worth mentioning. The financial system realizes transferring of funds from individuals who have excess funds at hand to those individuals who have a shortage. Financial system has a remarkable role in contribution to higher economic efficiency thanks to channeling funds from individuals who do not utilize it productively to those people who can use it effectively (Mishkin, 2016 ).From another perspective, FIs will lead to increased variety of financial products and services. Eventually, highly customized financial products and services will emerge which will cause to better matching of individual savers with those of companies raising funds for expanding and improving future products (Ertuğrul & Duran, 2020 ). As a result, obtained capital accumulation and higher economic efficiency will lead to economic growth (Chou, 2007 ). In addition, developing and innovating financial products and financial system is also main driver for economic growth (Dinçer, Yüksel, Korsakienė, Raišienė, & Bilan, 2019b ; Dinçer, Yüksel, & Martínez, 2019a ). Because such kind of development and innovations in financial sector will reduce asymmetric information, mobilize savings, allocate funds, facilitate trade, enhance corporate governance, and diversify risks (Levine, 1997 ; Pagano, 1993 ).In economic literature, there are two different thoughts which attempt to explain the nexus between financial improvement and economic growth. The proponents of the supply-leading view point out that financial development has a positive impact on economic growth (Beck, Levine, & Loayza, 2000 ; Calderon & Liu, 2003 ; King & Levine, 1993a , 1993b ; Levine, 1997 ; Levine, Loayza, & Beck, 2000 ; Schumpeter, 1911 ). The advocates of this thought indicate the existence of casual relationship running from financial development to economic growth. However, the proponents of the other thought which is demand-following view claim that financial improvement respond to changes in the real output level (Ireland, 1994
eBook - PDF- Richard A. Bettis(Author)
- 2009(Publication Date)
- Wiley-Blackwell(Publisher)
STRATEGIC INNOVATION IN FINANCIAL SERVICES 177 themselves (Schmookler, 1966; Scherer, 1980; Mansfield, 1968). Also, distinctions are made between incremental and radical innovations in relation to the degree of newness. Hence, while an incremental innovation is a cumulative series of minor changes, a radical innovation is a major change (Tidd et al., 2001). When looking at the topic of innovation in financial services, there seems to be a lack of research. A literature in the field of Financial Innovation started to develop in the early 1980s, when deregulation appeared to be one of the drivers of changes in the UK financial services. Therefore, some of the studies were mainly concerned with the macroeconomic aspects of Financial Innovation, for example how new financial instruments (options, swaps, etc.) could affect the efficiency of the UK financial system (Llewellyn, 1992). In this regard Llewellyn’s (1992) approach follows the early approach of Silber (1975) who argues that Financial Innovation responds to economic forces in order to remove or lessen the financial constraints imposed on financial institutions. However, to date the limited literature does not clarify how innovation occurs in the financial services sector from a microeconomic point of view. Recent research conducted by Sundbo (1997) in the field of innova-tion in the services industry may represent a good references’ source to refer to. In his studies, Sundbo concluded that innovation takes place in service firms, although it may empirically be difficult to distinguish it from organizational learning. He also stated that innovation theories developed from studies of the manufacturing sector are applicable to the services industry.
- F. Fiordelisi, P. Molyneux, D. Previati, F. Fiordelisi, P. Molyneux, D. Previati(Authors)
- 2010(Publication Date)
- Palgrave Macmillan(Publisher)
Anderloni, L., and Bongini, P. (2009) “Is Financial Innovation still a relevant issue?” In Anderloni L., Llewellyn, D.T., and Schmidt, R. (eds) Financial innova- tion in retail and corporate banking, Edward Elgar, Cheltenham. Cammino, B., and Pellegrino, M. (2008) “Il nuovo che avanza” Bancaforte 5, ABI, Italy. Finnerty, J.D. (1992) “An overview of corporate securities innovation” Journal of applied corporate finance 4 (4): 23–39. Frame, W.S., and White, L.J. (2002) “Empirical Studies of Financial Innovation: Lots of Talk, Little Action?” FRB of Atlanta Working Paper 2002–12. Llewellyn, D.T. (2009) “Financial Innovation and the economics of banking and the financial system” In Anderloni, L., Llewellyn, D.T., and Schmidt R. (eds) Financial Innovation in retail and corporate banking, Edward Elgar, Cheltenham. Merton, R. (1992) “Financial Innovation and economic performance” Journal of applied corporate finance 4 (4) 12–22. Pavitt, K. (1984) “Sectoral patterns of technical change: towards a taxonomy and a theory” Research Policy 13, 343–373. Silber, W. (1975) Financial Innovation Lexington Books, MA, USA. Silber, W. (1983) “The process of Financial Innovation” American Economic Review 73, 89–95. Tufano, P. (1989) “Financial Innovation and first mover advantages” Journal of financial economics XXV, 213–240. 26 1. Introduction Over the last few years, the accession of new candidates to the European Union has posed an additional difficulty for the process of convergence towards a single European financial system. The official accession can- didates, most of them with underdeveloped financial systems, have made some reforms in order to become more market orientated. The aim of this chapter is to analyse empirically the process of con- vergence of the new EU members towards the European Union coun- tries (EU-15 countries) in financial terms during the period 1999–2007.
eBook - PDFAnnual World Bank Conference on Development Economics--Global 2010
Lessons from East Asia and the Global Financial Crisis
- Justin Yifu Lin, Boris Pleskovic(Authors)
- 2011(Publication Date)
- World Bank(Publisher)
The paper focuses on innovation activity, since technological progress depends on purposeful efforts to develop new technologies or, especially in developing countries, to move closer to the frontier by adopting existing technologies developed elsewhere. Even in the latter case, the adoption of existing technologies is costly, requiring local research and development (R&D) activity. In addition, the attainment of technological progress typically involves resource reallocation across firms, with higher-productivity firms expanding and laggards being driven out of business. For this reason, economic envi- ronments that facilitate such firm-level dynamism may be more conducive to higher rates of effective innovation activity. The role of investment in knowledge and resource reallocation in driving innovation activity suggests that the financial system has an important part to play in promoting innovation. For instance, the costs incurred in R&D may require external-to-the-firm funding. Similarly, if technological advances are embodied in new firms, this requires a financial system that is able to support the early-stage growth of de novo enterprises. At an industry level, if productivity growth is higher in some sectors than in others, the financial system must have the capability to redirect funding from slower-growing to faster-growing industries. For these reasons, a sizable literature emphasizes the importance of financial development in determining the level and effectiveness of innovation activity. In turn, the positive contribution of financial development begs the question of whether international financial integration has the potential to boost the level of innovation activity. First, international financial integration may be helpful as a result of the role played by financial globalization in accelerating the development of domestic financial systems in developing countries.
eBook - PDFInnovation, Governance and Entrepreneurship: How Do They Evolve in Middle Income Countries?
New Concepts, Trends and Challenges
- Sefer Sener, Stefan Schepers, Sefer Sener, Stefan Schepers(Authors)
- 2017(Publication Date)
- Palgrave Macmillan(Publisher)
Introduction Innovation is a value that has great importance in the globalised world. With the help of innovation, companies can develop themselves and stand out within their industry. Disseminating innovation within the company is the best way to ensure this. Training more qualified staff and innovation-oriented employees is very important for companies striving for innovation; it is an accepted fact that innovation gains value through technological developments. Companies that keep up with technological developments stand out amongst other companies through their innovative approach. Innovation, performance and financial performance are closely linked concepts. Innovation increases the performance of firms and also posi- tively affects productivity. Innovative organisations have a stronger Effects of Innovation and Financial Performance on Companies in the Middle Income European Countries Mustafa Yurttadur © The Author(s) 2017 S. Sener and S. Schepers (eds.), Innovation, Governance and Entrepreneurship: How Do They Evolve in Middle Income Countries?, DOI 10.1007/978-3-319-55926-1_10 175 M. Yurttadur (*) Faculty of Economics and Administrative Sciences, Istanbul Gelisim University, Istanbul, Turkey e-mail: [email protected] 176 M. Yurttadur corporate structure than other organisations, and having an innovative corporate structure facilitates organisations to attain a more dynamic framework. In this chapter, the effects of innovation, performance and financial performance on firms are explained in detail. It is considered that the benefit to the national economies in which these firms exist provided by the impact of financial performance and innovation is important, and that both of these concepts go hand in hand with economic develop- ment.
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