The effects of banking market structure on manufacturing sectors and the gains from financial integration

In the first chapter, I explore the effect of banking concentration and banking competition on the performance of manufacturing sectors. Theory offers ambiguous explanations regarding the effects of both banking concentration and banking competition on the size of manufacturing sectors and empirical studies using cross country data have not reached a consensus on these effects. I calculate a time series index of banking concentration for each country and using this index, I provide evidence that industries that rely more on external finance perform better in countries where there is a high level of banking concentration. I find the opposite result for banking competition.In the second chapter, I investigate the effect of banking concentration and banking competition on the volatility of growth of industrial level output. In this chapter, I bring together two strands of the literature, the first strand is the literature that looks at the effect of financial intermediaries on the volatility of output at different levels of aggregation, and the second strand is the literature that looks at the effect of banking concentration and banking competition on the credit access of the firms. I find that banking competition has a positive effect on the volatility of all industries and an additional positive effect on industries with higher investment opportunities. While banking concentration has a dampening on volatility of all industries and it does not have any significant effect on industries with higher investment opportunities.In the third chapter, I look at the benefits of financial integration. The literature has shown that the implied welfare gains from international financial integration are very small. We revisit the existing findings and document that welfare gains can be substantial under two scenarios: (a) the costs of remaining in autarky are worse than the standard neo-classical model would predict, and (b) financial integration has a direct affect on total factor productivity. By estimating the implied autarky path of convergence of rates of return from the actual data and calibrating the welfare gains based on this path, we find that the benefits are nearly 4.3 times larger than the previous estimates. We also find welfare gains are at least 2 times larger than estimates ignoring the productivity effect. The combined effect of realistic convergence and endogenous productivity as a result of financial integration is equivalent to a nearly 15% permanent increase in consumption for the average developing country.