Finance is powerful. Let us start with some positive aspects of financial world. Financial services provide vital services :allocate capital, monitor capital use , facilitate transactions and risk management. If financial systems provides these good services , the capital flow to most deserving and promising firms and it maximizes the utilization of capital and as a result enhance the world development. Secondly financial innovation and technological advancement are inextricably bounded together. As the economy expands the complexity of financial world increases. More sophisticated methods are required to access new enterprises and their novel risks. Without a commensurate modernization of financial system , the quality of financial services fall and economy growth slows . It is the fierce competition within the sector which keeps technology upgraded. Nor the traditional capital markets of London or New york have fuelled the technological innovations in information technology, tele communication and medicine that we have experienced over last 30 years.
Let us take example of Bio technology sector.The story of biotechnology in the 21st century provides a natural continuation of this virtuous cycle of financial innovation, technological change and economic growth. The venture capital model of corporate finance did not work well for biotechnology. Venture capitalists could not effectively evaluate biotech firms because of the scientific breadth of biotechnologies, which frequently require input from biologists, geneticists, chemists, engineers, bioroboticists and other scientists, enormous capital injections and expertise with the myriad of laws associated with bringing new medical products to market. It was unfeasible to house all of this expertise in banks or even venture capital firms.
So, financiers innovated. They formed new financial and contractual partnerships with the one kind of organisation that has the breadth of skills to screen bio-tech firms: large pharmaceutical companies. Through scientific know-how, legal expertise and connections with product distribution networks, pharmaceutical companies identified promising biotech firms, helped them create valuable products and attracted other investors. While financial modernisation is not the only cause of technological change, the adaptation of corporate financing techniques has greased the wheels of technological inventiveness underlying economic growth. Put differently, without financial innovation, improvements in diagnostic and surgical procedures, prosthetic devices, parasite-resistant crops, and an array of other life-saving and life-improving inventions would be occurring at a far slower pace.
Even the most conventional components of modern finance, such as debt contracts and liquid securities markets, were themselves once financial innovations that circumvented former barriers to investment and growth. So the financial innovation created by the giants of this sector - BOA, Citibank,Goldman,J P Morgan contributed a lot to the rapid development in past century.
Financial innovation is critical if we are to enjoy rapid rates of economic progress in the coming century, but innovation, change and growth can threaten stability. Improvements in financial regulation can reduce the risks of financial crises without curtailing sustained economic growth. In finance, as in medical research, encouraging the healthy application of human creativity requires some regulatory guideposts.
I have forgot to mention about venture capitalists which indeed a product of financial innovation. Venture capital firms arose to evaluate and fund high-tech entrepreneurs. Staffed by techies, venture capital firms screened potential enterprises and then made large, long-term financial commitments to the most promising ones, which encouraged the blossoming of new technologies that have reshaped our lives.
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