We provide a theoretical framework to address the historical debate about the role of banks in industrialization. We introduce banks into a model of the big push to examine under what circumstances profit-motivated banks would engage in coordination of investments. We show that banks may act as 'catalysts' for industrialization provided that: (i) they are sufficiently large to mobilize a 'critical mass' of firms, and (ii) they possess sufficient market power to make profits from coordination. Our model also shows that universal banking helps reduce endogenously derived coordination costs. Our results delineate the strengths and limits of Gershenkron's (1962) view of banks in economic development, and help explain a diverse set of historical experiences. We examine both countries where banks were associated with industrialization, showing that our theoretical conditions holds, as well as countries where the failure to industrialize can be related at least in part to the absence of our necessary conditions.
Publication Date
Financial Markets Group Discussion Papers DP 343
