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Eighth pillar: Financial market development
The recent financial crisis has highlighted the central
role of a sound and well-functioning financial sector for
economic activities.
An efficient financial sector allocates
the resources saved by a nation’s citizens, as well as those
entering the economy from abroad, to their most productive
uses.
It channels resources to those entrepreneurial
or investment projects with the highest expected rates
of return rather than to the politically connected.
A thorough and proper assessment of risk is therefore a
key ingredient.
Business investment is critical to productivity.
Therefore economies require sophisticated financial
markets that can make capital available for private-sector
investment from such sources as loans from a sound
banking sector,
properly regulated securities exchanges,
venture capital, and other financial products.
The importance of such access to capital was recently underscored
by the liquidity crunch experienced by businesses and
the public sector in both developing and developed
countries.
In order to fulfill all those functions, the
banking sector needs to be trustworthy and transparent,
and—as has been made so clear recently—financial
markets need appropriate regulation to protect investors
and other actors in the economy at large.
Ninth pillar: Technological readiness
In today’s globalized world, technology has increasingly
become an important element for firms to compete
and prosper.
The technological readiness pillar measures
the agility with which an economy adopts existing technologies
to enhance the productivity of its industries,
with specific emphasis on its capacity to fully leverage
information and communication technologies (ICT) in
daily activities and production processes for increased
efficiency and competitiveness.ICT has evolved into
the “general purpose technology” of our time,
given the critical spillovers to the other economic sectors and
their role as industry-wide enabling infrastructure.
Therefore ICT access and usage are key enablers of
countries’ overall technological readiness.
Whether the technology used has or has not been
developed within national borders is irrelevant for its ability
to enhance productivity.
The central point is that the
firms operating in the country have access to advanced
products and blueprints and the ability to use them.
Among the main sources of foreign technology, FDI often
plays a key role.
It is important to note that, in this context,
the level of technology available to firms in a country
needs to be distinguished from the country’s ability to
innovate and expand the frontiers of knowledge.
That is why we separate technological readiness from innovation,
which is captured in the 12th pillar below.
Tenth pillar: Market size
The size of the market affects productivity since large
markets allow firms to exploit economies of scale.
Traditionally, the markets available to firms have been
constrained by national borders.
In the era of globalization,
international markets have become a substitute for
domestic markets, especially for small countries.
There is vast empirical evidence showing that trade openness is
positively associated with growth.
Even if some recent research casts doubts on the robustness of this relationship,
the general sense is that trade has a positive effect
on growth, especially for countries with small domestic
markets.
Thus exports can be thought of as a substitute for
domestic demand in determining the size of the market
for the firms of a country.
By including both domestic and foreign markets in our measure of market size,
we give credit to export-driven economies and geographic
areas (such as the European Union) that are broken into
many countries but have a single common market
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