Impact of Institutional Quality on Bilateral Exports: Exploring the role of Development

Abstract

This study uses the gravity model to analyze the homogeneous and heterogeneous effect of institutional quality and development on bilateral exports. We use the panel data of 61countries for the period 2000 to 2016 and employ the Poisson Pseudo Maximum Liklihood (PPML) econometric technique with a High-Dimensional fixed effect (HDFE) for an estimation that allows the analysis in the presence of high dimensional fixed effects. The findings reveal that the direct effect of institutional quality and level of development on bilateral exports is positive and significant. Further, the institutional quality and the level of development of the exporter country have more impact on bilateral exports than that of the importer country. Our estimation results of homogeneity of institutions show that when both trading countries share the same level of institutional quality, it boosts the bilateral exports. The major finding of this study reveals that the interaction effect of institutional quality and level of development on bilateral exports is positive and significant. High value of interaction term of exporter economy and low value of importer country suggest that interaction effect of institutional quality and level of development on bilateral exports of exporter country have a greater impact than the interaction effect of institutional quality and level of development of importer country due to having the more production and exports facilities in exporter country. Based on the findings, some essential policies are also recommended, followed by some future research gaps.