Impact of Financial Development on Productive Capacity: The Role of Digital Economy

Abstract

In an era of slowing productivity growth and rising global competition, enhancing productive capacity has emerged as a central challenge for advanced economies. Financial development and the rapid diffusion of digital technologies are increasingly viewed as powerful mechanisms for improving investment efficiency, innovation, and resource allocation. Although, the growing role of financial development and the digital economy in enhancing productive capacity, limited evidence exists on their combined effects on productive capacity in OECD economies. This study examines the impact of financial development on productive capacity and the moderating role of the digital economy in OECD countries over the period 2005–2022. Employing the Driscoll–Kraay standard error approach, dynamic GMM, and method-of-moments quantile regression, the analysis reveals that financial development-through both financial markets and institutions-significantly enhances productive capacity. The positive effect is strongest at lower quantiles and gradually weakens, becoming insignificant at higher quantiles. Moreover, the digital economy amplifies the productivity-enhancing role of financial development, particularly in countries with lower productive capacity, while its influence diminishes at higher levels of productive capacity. These findings underscore the importance of strengthening financial systems and accelerating digital transformation as complementary policy tools for boosting productive capacity. Well-designed financial and digital policies can help narrow capacity gaps, improve economic resilience, and foster more inclusive and sustainable growth across OECD economies.