"Financial development and patents during the First Industrial Revolution: England and Wales"

How does financial development affect patents in the Industrial Revolution? During this period, the development of public finance squeezed private investment (Temin & Voth, 2013) and interest rates in private sectors remained high (Ventura & Voth, 2015). Evidence about the link between banks and innovation remains anecdotal. In this paper, I examine the impacts of country banks on innovation in England during the First Industrial Revolution.
This project engages with the literature on the causes of the Industrial Revolution. Bank credits could lower research costs of inventions that replace labour with cheaper capital (Allen, 2009) and nourish markets where skilled craftsmen generated innovation (Mokyr, 2009). This project seeks to identify the impacts of banks on innovation, as measured by patents, during the Industrial Revolution and improve our understanding of the role of financial institutions during this period. It also contributes to the literature about financial markets and economic growth as innovation is important in enhancing economic growth (Solow, 1957). Evidence from American history shows that better access to banks spurs innovation (Nanda & Nicholas, 2014). My work tests the external validity of the literature in England, a relatively more homogeneous institution.
I collect data on patents and country banks in England and Wales between 1750 and 1825 from Woodcroft (1854) and Dawes and Ward-Perkins (2000), and geolocate the patentees and banks. I control for district and year fixed effects and my OLS estimates suggest that the elasticities between the number of banks per capita and patents per capita are about 0.044 to 0.050. To solve potential endogeneity concerns, I construct an instrumental variable based on post-town status and find that elasticities are about 0.164 to 0.218. I use the fact that the number of banks grew faster in post towns. The effects are driven by patents in the industrial sector.