This study enhances existing literature by examining the interplay between artificial intelligence, technological innovation, and financial development within the framework of Endogenous Growth Theory in G20 countries — an area that has received limited attention. Our study highlights the unique role of government effectiveness as a mediating factor, showing how strong governance can amplify the positive effects of AI and technological innovation on financial growth. By focusing on a diverse set of G20 nations, the research offers a comprehensive analysis that recognizes the varied economic contexts and developmental stages within the group. Moreover, the findings reveal that the impacts of AI and technological innovation differ across income levels and economic settings, providing valuable insights for policymakers. Ultimately, our study not only explains the mechanisms driving financial development but also underlines the need for tailored strategies that combine technological innovation with effective governance to promote sustainable economic growth in G20 countries.
Financial development refers to the process through which a country’s financial system evolves to efficiently facilitate the allocation of resources, improve market access, and enhance financial stability (Ali et al., 2022; Siddik et al., 2025; Trebicka et al., 2024). It includes the development of financial institutions, markets, instruments, and regulations that enable the smooth flow of capital, support investment, and foster economic growth (Ullah et al., 2024). A well-developed financial system promotes access to credit, enhances market efficiency, and supports entrepreneurial activities, which are essential for overall economic progress. Financial development is crucial for a country’s development as it directly influences economic stability and growth(Elgharib, 2024; Younsi and Bechtini, 2020). A robust financial system enables businesses to access funding, boosts investment in key sectors, and helps in managing risks. It also encourages savings and ensures that capital is allocated to the most productive uses, leading to higher productivity, innovation, and improved living standards. Moreover, financial development often leads to better financial inclusion, which reduces inequality and promotes inclusive growth. In the context of the G20 countries, technology plays a transformative role in reshaping financial development. The adoption of financial technologies, FinTech, AI, and digital payment systems improves the efficiency and accessibility of financial services, particularly for underserved populations. Technologies like blockchain and big data analytics enhance transparency, reduce transaction costs, and increase the speed of financial services(Egwuonwu et al., 2024; Liao et al., 2024; Ravi and Kamaruddin, 2017). For G20 economies, embracing these innovations can foster financial inclusion, boost market liquidity, and drive economic resilience, thereby accelerating sustainable development and growth. Therefore, our study investigates the impact of AI and technological innovation on the financial development of G20 countries, with a specific focus on how government effectiveness mediates these relationships.
The literature review synthesizes recent studies examining the interplay between artificial intelligence, technological innovation, and financial development, focusing on the mediating role of government effectiveness in G20 countries. The existing literature illustrates critical relationships among financial inclusion, technological advancements, and economic development, essential for understanding these interactions (Ali et al., 2022; Babajide et al., 2020; Elgharib, 2024; How et al., 2020; Lenka, 2022; Ravikumar, 2019). Lenka (2022) establishes a foundational link between financial inclusion and financial development in India, emphasizing the significance of expanding access to financial services for overall economic growth. Similarly, Ofori et al. (2022) highlight the role of ICT diffusion in promoting inclusive growth in Sub-Saharan Africa, advocating for integrated policies that leverage both technology and finance. This synergy can create an environment conducive to economic progress, particularly in regions where traditional financial systems may be less effective. Zhang et al. (2024) examine the spatial spillover effects of financial growth on high-quality development in China’s Yellow River Basin, finding that financial growth influences development through green innovation, which underlines the importance of sustainable practices in financial strategies. Ali et al. (2022) further demonstrate that robust institutions positively moderate the relationship between financial inclusion and economic growth in OIC countries, stressing the need to strengthen institutional frameworks to support successful financial initiatives. Liu et al. (2024) analyze the impact of digital technology on banking efficiency in Pakistan, concluding that digitalization fosters efficiency gains and convergence among banks, indicating that technological adoption is crucial for enhancing financial services.
The relationship between technological innovation and economic growth is complex. Cetin et al. (2021) find that while technological innovation drives growth, it may exacerbate income inequality if not managed properly, indicating the necessity of targeted policy interventions. Zhao et al. (2024) focus on perceived transaction costs affecting fintech adoption, highlighting the importance of situational factors in facilitating technology integration into financial systems. Phuc Nguyen et al. (2020) emphasize mobile technology as a critical driver for financial inclusion, suggesting that policymakers prioritize mobile solutions, particularly in regions with limited internet access. Maryaningsih et al. (2022) explore Central Bank Digital Currency (CBDC) adoption, revealing that financial inclusion significantly impacts the success of retail CBDCs, while wholesale CBDCs are more aligned with developed markets. Their findings suggest that countries should tailor digital currency strategies to their specific economic contexts. Additionally, Mehmood and Kaewsaeng-On (2024) find that natural resource abundance, technological innovation, and human capital all contribute positively to financial development in emerging economies. Their study reveals that while resources are often viewed as a curse, they can be a blessing when combined with technological innovation and investments in human capital.
Yamin and Abdalatif (2024) explore consumer behavior toward QR code mobile payments, emphasizing the roles of perceived usefulness and convenience in shaping user acceptance. Chen and Lu (2024) assess the effects of administrative penalties on big data innovation, showing their normative impact on fostering a conducive business ecosystem that encourages technological advancements. Tissaoui et al. (2024) investigate financial inclusion’s positive effects on human development in low- and middle-income countries, indicating that broader access to financial services can enhance overall societal well-being. Muat et al. (2024) review financial capabilities among young adults, advocating for enhanced financial education to empower future generations in managing their economic futures. Lastly, Tan et al. (2024) discuss the role of green digital finance in promoting technology diffusion, further highlighting the synergy between financial mechanisms and sustainable development.
Despite these insights, significant research gaps remain regarding the nuanced interactions between AI, technological innovation, and financial development across different contexts, particularly within the G20. Most existing studies focus on specific regions or technologies without comprehensively analyzing how government effectiveness mediates these relationships. For instance, while Yang and Wang (2023) explore the effects of financial development on manufacturing innovation, they do not fully address how government policies can facilitate or hinder these dynamics. Furthermore, while there is substantial literature on the role of fintech in financial development (Aduba et al., 2023), fewer studies examine how government effectiveness influences the adoption and impact of these technologies. This study aims to fill these gaps by investigating the complex relationships between AI, technological innovation, and financial development within the G20 framework, specifically emphasizing government effectiveness. By doing so, it addresses the unique context of G20 countries, where diverse economic conditions, regulatory environments, and technological advancements converge. The integration of AI and technological innovation is crucial for fostering financial inclusion and growth, making the exploration of these dynamics within the G20 context both timely and necessary. Finally, this study is unique in its approach, combining insights from existing literature with an empirical analysis of G20 countries to better understand how government effectiveness mediates the relationship between AI, technological innovation, and financial development. By identifying the roles effective governance and policy frameworks play in shaping these interactions, this research aims to provide actionable recommendations for policymakers seeking to harness AI and technological advancements to promote inclusive and sustainable financial development.
Endogenous growth theory suggests that long-term economic growth comes from within an economy — driven mainly by technological innovation and the accumulation of knowledge, which in turn boost productivity and competitiveness (Howitt, 2010; Jiao et al., 2024; Roberts and Setterfield, 2007). Recent research shows that digital advancements are key to stimulating growth in different regions. For example, Okolo et al. (2025) find that greater internet usage can spur technical innovation by improving digital infrastructure and enabling the sharing of knowledge. Similarly, Owoeye et al. (2022) reveal that the spread of ICT in Sub-Saharan Africa plays a crucial role in linking financial development with economic growth, even though its impact can vary by context.
Financial development itself reinforces this theory. Huang et al. (2016) show that in western China, financial progress enhances growth by boosting overall productivity, while Narayan (2019) illustrates how fintech initiatives in Indonesia are transforming traditional financial services into more advanced, technology-driven models. Maghyereh et al. (2025) also highlight that green innovation — backed by strict environmental policies — drives sustainable energy transition investments. Evidence from Africa by Hussein et al. (2025) demonstrates that higher R&D spending and more patent registrations help stimulate technological creation and promote international trade and economic development. Jiao et al. (2024) argue that technological innovation fuels shift in industrial structures, a central idea in endogenous growth theory, while Wang et al. (2023) and Liu et al. (2022) show that standardization and corporate investment, respectively, respond positively to innovation shocks. (Iqbal et al., 2022) further reveal that innovation, combined with factors like air transport and FDI, creates a dynamic cycle that sustains growth in emerging economies.
Building on this framework, our study examines how AI and technological innovation act as catalysts for financial development in G20 countries. We specifically focus on the mediating role of government effectiveness — which includes efficient public administration, strong regulatory quality, and sound policymaking — in supporting and spreading new technologies. Effective governments create a stable, transparent environment that not only nurtures innovation but also reduces transaction costs and builds market confidence. This synergy between technological progress and high-quality institutions, as highlighted by endogenous growth theory, offers a comprehensive explanation for how internal factors drive financial development in advanced economies. Figure 1 shows the theoretical framework of the study.
