Country's Institutional Framework Research Articles

Environmental impact of foreign direct investment in Turkey: does the quality of institutions matter? Evidence from time series analysis using the Fourier extension.

Since the 1980s, Turkey has experienced a significant increase in both foreign direct investment (FDI) and its ecological footprint (EFP). While FDI is widely acknowledged as a pivotal driver of economic growth, its impact on environmental degradation is multifaceted and debated. Moreover, a country's institutional framework plays a key role in shaping this relationship. Yet, the influence of institutional structures on the FDI-environment nexus is often neglected in current literature. In this study, we investigate the environmental implications of FDI in Turkey from 1984 to 2018, employing time series analysis with a Fourier extension and accounting for institutional quality. Fourier function models give more effective results in modeling structural breaks. We first use Fourier techniques to assess the unit root and cointegration relationship. Upon establishing cointegration, we employ the DOLS estimator, extended with Fourier terms, to determine the long-term coefficients. We then assess the causal relationship between the variables using the Fourier causality test. Our findings indicate that while FDI exacerbates environmental degradation (supporting the pollution haven hypothesis), the interaction term of FDI-institutional quality mitigates this degradation (supporting the pollution halo hypothesis). Given these empirical findings, this study suggests that strengthening Turkey's institutional quality has the potential to amplify the environmental advantages of FDI, alongside its economic benefits.

IFRS and FPI nexus: does the quality of the institutional framework matter for African countries?

PurposeThe institutional framework of an African country may influence the effectiveness of the International Financial Reporting Standards (IFRS) on foreign investment inflows. The purpose of this paper is to argue that the quality of a country's institutional framework impacts the effectiveness of IFRS to an adopting country and ultimately influences the levels of Foreign Portfolio Investment (FPI).Design/methodology/approachEmploying country-level data. A sample of 15 countries from Africa is used. Data is collected over a period of 22 years (1994–2014). The authors employ the General Method of Moments (GMM) panel regression technique to examine whether the quality of a country's institutional framework has an impact on the relationship between IFRS and FPI and the Propensity Score Matching (PSM) technique to assess the level of impact.FindingsThe findings reveal that the quality of a country's institutional framework moderates the strength of the association between IFRS and FPI. Overall, the authors find that the quality of the institutional frameworks in African countries has a negative effect on the IFRS and FPI nexus.Research limitations/implicationsThe study focuses exclusively on African countries; using an exclusively African sample limits the generalisation of results to other continents like Latin America with similar environments to Africa.Practical implicationsThis study provide evidence that IFRS alone cannot ensure the intended capital market benefits but encourages the development of strong institutions in African countries to realise the most from IFRS adoption. The emphasis on institutional development is an essential contribution that this study makes.Originality/valueThis study is unique since it emphasises the importance of institutional framework quality when considering the impact of IFRS on foreign investment inflows in an African setting.

Too good to be true: The inverted U-shaped relationship between home-country digitalization and environmental performance

Digitalization has been seen in the past as a panacea as it has been argued that higher digitalization will translate into better environmental performance. As the process of digitalization has advanced, however, some environmental drawbacks have been encountered and need to be addressed. We thus explore the inverted U-shaped relationship between home country digitalization and environmental performance. We hypothesize that in the first stage, home country digitalization has a positive impact on environmental performance (e.g., enhanced energy efficiency and resource management), but then it reaches a tipping point at which an excessive level of digitalization causes a “rebound effect,” hence increasing the use of resources and resulting in higher pollution. Our panel data of 5015 firms from 47 countries in 10 sectors for the period 2014–2019 confirms our predictions. The panel smooth transition regression model (PSTR) confirms the moderating effect of the level of a country's institutional framework on this relationship between digital transformation and environmental performance. More particularly, our results show that countries with stronger institutional frameworks flatten the inverted U-shaped curve.

Institutional factors affecting entrepreneurship: A QCA analysis

A country's institutional framework plays a crucial role in promoting entrepreneurship, which drives economic growth. Encouraging a minimum level of certainty in ambiguous environments characterized by risk taking is important. Aware of this importance, we analyze the influence of institutional factors on entrepreneurship development. Specifically, we analyze political stability, government effectiveness, regulatory quality, a robust rule of law, the ease of starting a new business, and the ease of obtaining credit. We develop two models to explain the presence and absence of entrepreneurship. To do so, we apply qualitative comparative analysis (QCA) to a sample of 48 countries using data sourced from the Global Entrepreneurship Monitor and the Global Innovation Index. The results show that the effect of institutional factors on the level of entrepreneurship varies according to the socioeconomic characteristics of each country. They suggest that a wide range of institutional configurations lead to the presence or absence of entrepreneurship. Although entrepreneurship can be found in unfavorable institutional environments, future research should examine how to formalize such environments as a standardized institutional configuration to shift from necessity to opportunity entrepreneurship. Achieving this shift is relevant for innovation and economic development.

Determinants of stock market returns in emerging markets: The linkage between institutional quality and macro liquidity

AbstractThis article identifies that the institutional framework of a country and its liquidity are the main key drivers of stock market returns. To study this, we used the worldwide governance indicators as proxies to measure institutional quality. We apply the Sys‐GMM to model the correlational relationship of our variables. Our analysis for both institutional quality and macro liquidity in this study differs from the mainstream literature. In this paper, we modelled the stock market returns by adding the quality of a country's institutional framework and the country's liquidity level (measured by M2 account of money supply) to redefine classical models found in the mainstream literature. Sys‐GMM is applied for a panel of 34 emerging countries between 2002 and 2013. We observed an excess of liquidity for the country's level positively affects stock market returns in these countries. This positive influence is actually enhanced through the development of an adequate institutional framework. In this context, a high national liquidity volatility, as it is often observed in emerging countries, is not necessarily a bad thing for the financial markets and their influence can actually be enhanced through an adequate institutional structure to promote long‐term wealth for the society's well‐being and not only the wealth resulting from temporary capital market returns.

Implications of institutional frameworks for renewable energy policy administration: Case study of the Esaghem, Cameroon community PV solar electrification project

This study analyzed a rural renewable energy project—the Esaghem Village solar photovoltaic-based electrification project—in Manyu Division, Cameroon. The aim was to unveil impediments to the project rooted in the country's institutional framework for energy policy administration. The framework adheres to the country's Weberian-style administrative machinery. Conspicuous features of the machinery, including its pyramidal structure, tendency for top-down hierarchical communication, aversion for interorganizational interaction, and standardization are shown to constitute major institutional impediments. These features caused problems such as a lack of information, skills, and innovation. They also exacerbated problems relating to custom formalities and stand to threaten project sustainability. Administrative reform actions including the promotion of inter-organizational coordination, administration decentralization reinforced with the creation of renewable energy extension programs, and market-oriented liberalization measures are recommended. These reforms promise to facilitate the diffusion of solar PV electrification and other renewable energy technologies in Camerooon and other developing countries.

Global cash flow sensitivities

We examine the role of a country's institutional framework for investment and financing activities. A country's financial structure, investor rights, and legal environment are important determinants of the relation between cash flow and firms’ investment and financing behavior. Firms from countries with a stronger institutional framework exhibit higher financing-cash flow sensitivities. These firms are more likely to substitute a cash flow shortfall with issuing equity. Conversely, investment-cash flow sensitivities are higher for firms in countries with a weaker institutional framework.

The Effects of Corporate and Country Sustainability Characteristics on The Cost of Debt: An International Investigation

AbstractWe investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based in 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability, relating to both social and environmental frameworks, has a statistically and economically impactful effect on direct financing of economic activity. An increase of one unit in a country's sustainability score is associated with an average decrease in the cost of debt by 64 basis points. Our international analysis shows that the environmental dimension of a country's institutional framework is approximately twice as impactful as the social dimension, when it comes to determining the cost of corporate loans. On the other hand, we find no conclusive evidence that firm‐level sustainability influences the interest rates charged to borrowing firms by banks. Our main findings survive a battery of robustness tests and additional analyses concerning subsamples, alternative sustainability metrics and the effects of financial crisis.

Transforming Vietnam: a quest for improved efficiency and transparency in central government procurement

This case study on Vietnam investigates how a country's institutional framework can determine its participation in the World Trade Organization's Government Procurement Agreement (GPA). Using a cost-benefit approach, this article explores the relationship between institutional framework and procurement liberalisation, and examines how effective institutional reforms can trigger liberalisation. Findings show that the critical success factors for institutional reform are political commitment, the ability to craft an appropriate agenda, and eventual compliance with rules. There is an inverse relationship between costs and benefits of institutional reform, suggesting that Vietnam might prefer employing GPA observer status as a means for procurement liberalisation.

The Effects of Corporate and Country Sustainability Characteristics on the Cost of Debt: An International Investigation

We investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based on 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability related to both social and environmental frameworks has a statistically and economically impactful effect on direct financing of economic activity. An increase of one unit in country sustainability scores is associated with an average decrease in the costs of debt by 64 basis points. Our analysis shows that the environmental dimension of a country's institutional framework is approximately two times as impactful as the societal dimension when it comes to determining the cost of corporate loans. On the other hand, we find no conclusive evidence that firm-level sustainability influences the interest rates charged to borrowing firms by banks.

National Systems of Entrepreneurship: Measurement issues and policy implications

We introduce a novel concept of National Systems of Entrepreneurship and provide an approach to characterizing them. National Systems of Entrepreneurship are fundamentally resource allocation systems that are driven by individual-level opportunity pursuit, through the creation of new ventures, with this activity and its outcomes regulated by country-specific institutional characteristics. In contrast with the institutional emphasis of the National Systems of Innovation frameworks, where institutions engender and regulate action, National Systems of Entrepreneurship are driven by individuals, with institutions regulating who acts and the outcomes of individual action. Building on these principles, we also introduce a novel index methodology to characterize National Systems of Entrepreneurship. The distinctive features of the methodology are: (1) systemic approach, which allows interactions between components of National Systems of Entrepreneurship; (2) the Penalty for Bottleneck feature, which identifies bottleneck factors that hold back system performance; (3) contextualization, which recognizes that national entrepreneurship processes are always embedded in a given country's institutional framework.

Uniform regulation of executive pay at banks: Will it make a difference? The case study of Poland

The executive remuneration system in the financial sector requires significant improvements to increase disclosure and more closely converge shareholders’ and depositors’ interests. Executive remuneration practices have, therefore, been under review since the financial crisis of 2008. The purpose of the article is to examine how much the current practices of bank executive compensation in Poland differ from the recommendations issued by international organisations. The question is whether the new legal rules will have a significant impact on bank executive remuneration in Poland and will help solve corporate governance problem. The analyses based on the sample of listed banks show that new regulation effective as of 1 January 2012 is to force changes in the approach to executive remuneration in the banking sector. Firstly, banks will be obliged to adapt to the more rigorous requirements regarding disclosure of executive remuneration policy and its structure. Secondly, the long-term incentive programmes will become more important because of the need to defer a large part of the variable compensation and to use instruments other than cash. However, they may pursue a more conservative compensation policy. This could mean a further increase in basic salary, and it may limit sensitivity between pay and corporate performance and also increase fixed costs for banks. Ultimately, the new Polish regulation that refers almost exclusively to the variable component of executive remuneration will have negligible impact. This shows that uniform regulation regardless of a country's institutional framework may have adverse impact and fail to solve the original problem of corporate governance: the weak linkage between executive remuneration and corporate performance. The findings will be relevant for both academics and practitioners, in particular policy-makers.

Structural Reforms and the Growth of Developing-Country Multinational Firms

We analyze the impact of structural reforms on the multinationalization strategy of developed, developing, and least-developed country firms. Structural reforms are a form of institutional change whereby a country's institutional framework is realigned to improve governance and facilitate market functioning. We argue that structural reforms help firms become multinationals by reforming institutions that support the international competitiveness and multinationalization of firms. However, we propose that structural reforms have a differential impact on the multinationalization strategy of firms depending on the level of institutional voids in the country. Specifically, we argue that structural reforms have the highest positive impact on the multinationalization strategy of developing-country firms, followed by developed-country firms, and then by least-developed country firms. Structural reforms especially accelerate the multinationalization of developing-country firms by reducing institutional voids that constrain their competitiveness, institutional voids that are not prevalent in developed countries. However, this is not the case for firms from the least-developed countries because countries have to be above a threshold of institutional development for their firms to fully benefit from structural reforms. As such, structural reforms reduce the multinationalization gap between developed and developing-country firms, but increase the gap between least-developed country firms and those from more developed countries.

International Earnings Comparability

We investigate the comparability of accounting earnings for 14 EU countries in the period 1990-2005. Although prior studies have documented international differences in financial reporting properties, there is hardly any large-scale international evidence on the underlying fundamentals driving these differences. The European Union is a particularly interesting setting to study because of the substantial efforts to create a single economic market across countries. We focus on the accruals - cash flow association as in Ball and Shivakumar (2005; 2006) and show that accruals measurement is substantially affected by the business cycle stage and firm specific reporting incentives. Incentives arise from the equity capital market, debt financing and labor markets. These incentives are further intensified by the design of a country's institutional framework, such as stock market development, importance of bank financing and labor union membership. In addition, our results suggest that the mandatory introduction of IFRS in 2005 did not instantly bring about the expected improvement in earnings comparability across Europe. Our results provide important insights for the ongoing debate on standards versus incentives.

The Relevance of Target Accounting Quality to the Long‐Term Success of Cross‐Border Mergers

Abstract:  We investigate a sample of cross‐border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long‐term success of the acquisitions, measured by the post‐merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long‐term success. Employing a procedure recommended by Lyon et al. (1999), we find that US acquirers in cross‐border mergers experience significantly negative long‐term abnormal returns post‐merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post‐acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country‐specific features. The results reveal that post‐merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built‐in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross‐border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.

Scale effects in growth: A role for institutions

Reliance on a Dixit–Stiglitz production function leads the growth literature naïvely to associate economic scale with the size of a country's population. I develop an alternative approach in which market size is endogenous, reflecting a trade-off between the gains to exploiting non-rival skills and market transaction costs. Transaction costs reflect a country's institutional framework. The model supports scale effects in transitional growth rates and steady state income levels, suggesting scale effects may be important for developing countries. In this framework effective market size depends on a country's institutions. It is independent of population size and other macroeconomic variables.

The Relevance of Target Accounting Quality to the Long‐Term Success of Cross‐Border Mergers

Abstract:  We investigate a sample of cross‐border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long‐term success of the acquisitions, measured by the post‐merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long‐term success. Employing a procedure recommended by Lyon et al. (1999), we find that US acquirers in cross‐border mergers experience significantly negative long‐term abnormal returns post‐merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post‐acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country‐specific features. The results reveal that post‐merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built‐in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross‐border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.

Impact of manufactured goods' exports on economic growth: a dynamic econometric model for Nigeria

The impact of exports on growth has for a long time enmeshed in controversy partly due to both positive and negative effects empirically established in the literature. Still, most studies in developing countries have left detailed examination of exports' components and domestic institutions unexplored in the export-growth nexus. Based on an error correction model, this paper examines the impact of manufactured exports and its components on economic growth in Nigeria, taking cognisance of the country's institutional framework. Few of the components of manufactured exports were found to exert positive influence on growth both in the long and short runs. The paper, however, finds ample evidence in support of the relevance of quality of institutions in the economic growth process. In effect, with the right institutional framework, export-led growth, and specific focus on selected manufacturing sub sectors there appears to be a feasible development strategy for Nigeria. African Journal of Economic Policy Vol. 11(2) 2004: 1-26