Abstract：In this paper we attempt to fill the gap by examining how financial institutions affect technological innovation and thus affect growth. Our theory is based on the literature on soft budget constraints ( Ja´nos Kornai, 1980; Mathias Dewatripont and Eric Maskin,1995; Erik Berglof and Ge´rard Roland, 1998; Huang and Xu, 1998a; Yingyi Qian and Xu, 1998 ) and the literature on endogenous growth.
