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This paper uncovers evidence of a potentially important channel linking financial development to growth: the financing of innovations introduced by entrepreneurs. Using internationally comparable data on European countries, entry and exit in research intensive industries are found to be disproportionately sensitive to the level of financial development. Furthermore, financial development is related to increased R&D spending. The results are robust to several different measures of financial development, and are supported by surveys of the sources of finance used by entrepreneurs. The evidence suggests that intellectual property rights provide the institutional underpinning for financial markets to direct funds towards innovative entrepreneurs.
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