This thesis re-examines the relationship between finance and growth. Most previous
studies that have dealt with different aspects of this relationship show that a welldeveloped
financial system is important for economic growth. However, instead of
concentrating on the aggregated perspectives of this relationship, this research
investigates whether financial development influences the level of competition in the
real sector, as one possible mechanism through which finance may influence growth.
The study focuses on the changes in industrial structure and performance following a
regime change in the financial system: from financial repression to financial
liberalization. It has been suggested that financial liberalization may be a key policy
to promote industrialisation as it removes the credit access constraints on firms,
especially small and medium ones. Competition among financial institutions, which
accompanies financial liberalization, leads to greater availability of finance and a
reduction in the cost for firms of raising capital for investment. In turn, this
encourages creation and entry of new firms and promotes industrial growth,
particularly of those firms and sectors that are external finance dependent. The
implications of financial liberalization on the real sector are investigated using
industry-level panel data from Malawian manufacturing, a variety of econometric
methods, and standard measures of industry structure and performance, as well as
financial development indicators. The analysis aims to ascertain whether financial
liberalization in Malawi has had any impact on the availability of credit for
manufacturing firms and whether its effects, which are hypothesised to influence
industry structure and performance, differ depending on characteristics such as the
degree of external finance dependence of firms or firm size. The main empirical
findings show that financial liberalization, even if it results in greater supply of credit
and a larger number of lending institutions compared with the pre-reform period, does
not remove financing constraints on firms, especially the small and medium ones.
Instead, it is the large existing firms that benefit from a more liberal financial regime.
Indeed the evidence is that financial reforms have mostly facilitated the expansion of
existing establishments rather than the creation of new establishments, and have
resulted in greater industry concentration. Further, profitability and output growth are
disproportionately higher in large firms than in small ones. The implementation of
financial liberalization in Malawi has been judged a success; nevertheless the