Banks as catalysts for industrialization

We provide a new theory of the role of banks as catalysis for industrialization, In their influential analysis of continental European industrialization, Gerschenkron and Schumpeter argued that banks promoted the creation or new industries. We formalize this role of banks by introducing financial intermediaries into a "big push" model. We show that hanks may act as catalysts for industrialization provided they are sufficiently large to mobilize a critical mass of firms and that they posses sufficient market pokier to make profits from coordination, The theory provides simple conditions that help explain why banks seem to play a creative role in some but not in other emerging markets. The model also shows that universal banking helps to reduce the cost of acting as catalyst. (C) 2002 Elsevier Science (USA).