Quality Of Domestic Institutions Research Articles

An Analysis of Foreign Capital Inflows, Institutional Quality and Economic Performance in SAARC Countries

This paper is interested in seeing and exploring the relationship between foreign capital inflows, the quality of domestic institutions, and economic performance. The paper focuses on SAARC economies and utilizes data from 1996-2020. Our results show that foreign aid and economic growth of SAARC countries were positive results from all four techniques we used in our study. For imports, we got positive results in pooled least squares, whereas we got a negative impact of imports on the economic growth of SAARC countries in the other three techniques. We got the negative and insignificant impact of FDI in pooled least squares and generalized least squares, whereas we got the positive and significant impact of FDI in two stages of least squares. We learned about the negative and significant effects of debt on the economic growth of SAARC countries through all four techniques we have used. Regarding remittances, we got mixed results. Regarding institutions, we got institutions' negative and considerable impact on the economic development of SAARC countries in all specifications. Our results have important policy implications for SAARC economies.

Does institutional quality really matter for environmental quality?

In this paper, we introduce a new innovation into the institutions and environmental degradation nexus debate, by placing emphasis on institutional quality (good or poor) in the modelling framework, a clear departure from the existing literature that makes no such distinctions when using institutions to investigate the nexus. Using a panel of 163 countries, and applying a system generalised method of moment technique, we obtained robust evidence that the quality of institutions really matters in protecting the environment. In particular, we found that countries with strong institutions could significantly reduce environmental pollution by limiting fossil fuel consumption, while those with poor institutions would worsen the situation. Countries with strong institutions were also found to be able to curtail environmental problems in densely populated cities than those with weak institutions. The policy implications arising from the study are clear – strengthening the quality of domestic institutions that relate to environmental policy formulation and regulation, is critical to delivering a cleaner environment.

Why do some natural resource-rich countries adopt prudent fiscal rules? An empirical analysis

What is the relationship between natural resource wealth and the adoption of fiscal rules that may help resource-rich states mitigate the effects of a so-called resource curse? We argue that the adoption of fiscal rules by resource-rich countries is conditional on a number of previously unconnected factors, including whether states receive large amounts of rent from natural resources, have high levels of domestic institutional quality, or face external pressure to adopt such rules. Using panel data on 166 countries during the 1985–2015 period and accounting for current levels of democracy and the quality of domestic institutions, we find that countries deriving rents from natural resources are less likely to adopt prudent fiscal rules in general. However, the negative effect of natural resource wealth on the likelihood of states adopting fiscal rules is largely concentrated in countries with low institutional quality. Furthermore, we find that external pressure in the form of fiscal conditionality from the IMF increases the likelihood of states implementing fiscal rules, suggesting that there are ways that states can mitigate the ‘resource curse.’ These findings are robust to alternative data, model specifications, and estimation strategies, including the instrumental variable approach.

Inward FDI and the quality of domestic institutions: A cross-country panel VAR analysis

Domestic institutions are recognized as important factors in attracting foreign direct investment (FDI), and spurring economic development in host countries. There is increasing evidence, however, that FDI may in turn affect and shape domestic institutions, and it is generally difficult to disentangle these two effects. The present paper aims to shed light on this issue using extensive data on the quality of institutions and on inward FDI in 102 countries over a period of 25 years. We distinguish between different types of institution, FDI, and country, and we adopt a panel vector autoregression (VAR) approach to identify the direction of causality between the two variables. Our findings suggest that the quality of institutions matters for attracting FDI, but also that higher inflows of FDI have a significant short-term impact on the institutional quality of recipient economies. We also find that such a relationship varies with the type of FDI considered, and differs between transition and developing economies.

Does trade openness improve the quality of domestic institutions? Evidence from Africa

Research background: The research article deals with impacts of international trade openness on institutions in less developed economies, namely in Africa. Purpose of the article: It investigates the impacts of international trade openness on institutional quality in Africa measured by twelve various variables. Methods: It applies generalized methods of moments to a dynamic panel data of 34 African countries in the period of 1988?2012. Institutional quality data come from International Country Risk Guide, the rest from World Development Indicators and UNESCO databases. Findings & value added: Our results indicate that in the case of Africa, trade openness seems to be a positive and significant determinant of institutional quality, however, it differs across various institutional variables. Trade openness brings a positive impact on government stability, bureaucracy and law and order, we also identify its conflict-mitigating effects. This happens, unfortunately, with an exemption for natural resources exports. Trade openness also positively influences security and socioeconomic conditions, although we find the link much weaker. Regarding our control variables, we find two interesting results. First, GDP per capita has a strong and positive association with institutional quality when measured by one bundled indicator, however, individual variables show different intensities. Second, we find a strong and positive association of net foreign direct investment inflows and government stability. The added value of this research lies not only in focus on the less researched relationship, i.e., how trade impacts the institutional quality, but dominantly in focus on many institutional variables at once and comparison of their effects. Other empirical studies usually focus on selected variables only, or on selected trade items (natural resources).

On the political economy of trade agreements: A de jure and de facto analysis of institutions

This paper examines the effect of the quality of institutions on the membership in trade agreements from de jure and de facto perspectives, with a special focus on the Middle East North Africa (MENA) countries. First, for the de jure aspect, we analyze how the quality of domestic institutions in a country affects its likelihood of joining a trade agreement. Moreover, for the de facto aspect, this paper examines how the difference in quality of institutions among trading partners and enforceability degree affects the volume of trade among them. Our main findings show that the larger the difference in the quality of institutions, among MENA countries and their trade partners, the less likely they sign a trade agreement (deep compared to a shallower one). Moreover, the higher the enforcement degree of the agreement is, the greater the positive effect on trade flows. This result holds for the enforcement of the aspects related to the World Trade Organization provisions (WTOP) and those not related to it (WTOX). Yet, this positive effect of enforceability differs according to the content of legally enforceable provisions. Finally, our results hold even when we control for the selection bias related to joining a trade agreement, the endogeneity of enforcement and the way we measure both institutions and enforcement.

Institutional constraints and exporting of emerging‐market firms: The moderating role of innovation capabilities and digital transformation

Drawing from institutional arbitrage perspective and the view of organizational capability, we develop arguments showing how emerging‐market firms' (EMFs) innovation capabilities and digital transformation facilitate or constrain the importance of domestic institutional quality in their export activities. We use the data of Chinese firms collected from World Bank's Enterprise Survey database to test the research hypotheses. The results indicate that home country institutional constraints relate positively to export intensity. Moreover, this relationship is weakened by innovative capabilities but strengthened by digital transformation. We discuss the implications for theory and practice.

Domestic institutional quality and the effectiveness of global Greenhouse gases mitigation

This study addressed the effectiveness of Kyoto Protocol (KP) as an international institution and the interplay of domestic institutions and KP by employing a difference-in-difference estimation. The results indicated low effectiveness, in general, but not ineffectiveness. Regarding the KP, not only its formal and defined rules but also the demonstration of the intention to cooperate was bound to influence emissions’ reduction. Domestic institutions were more influential than the effects of KP international institution. However, political, legal rights, and economic institutional qualities presented distinct effects over emissions’ mitigation.

The Impacts of China–Africa Economic Relation on Factor Productivity of African Countries

This study attempts to empirically examine the impacts of the China–Africa economic relationship on factor productivity. The two-step system Generalized method of moments (GMM) estimator is applied to analyze the impacts of the Africa–China economic relationship on factor productivity of 44 African countries controlling Africa–China trade, Chinese foreign direct investment (FDI), and aid allocation to African countries for the periods 2003–2017. The estimation strategy controls endogeneity concerns. Another novelty of this study is calculating total factor productivity (TFP) using the regression approach and driving capital stock data. Additionally, the institutional quality index of countries is derived using principal component analysis. The findings of this study refer that the impact of the China–Africa economic relationship on the TFP of African countries is conditional to the domestic institutional quality of African countries. The results imply that the productivity embodied by the Africa–China economic relationship should be backed by the domestic adaptive capacity to use the benefit of China–Africa economic relations to excel factor productivity. Hence, the capability of African countries to benefit from the China–Africa economic relationship to enhance factor productivity should improve the institutional quality.

Institutional Quality and Sustainable Development of Industries’ Exports: Evidence from China

The knowledge about the relations between domestic institutional quality and the sustainable development of exports in emerging markets remains limited, since most research into the relations between the institutional environment and the sustainable development of exports has been conducted in developed market economies, especially in those of North America and Europe. With dynamic changes in the institutional environment of emerging countries over the years, this paper provides a novel perspective for investigating the relations above. This is the first paper to investigate the impact of institutional quality on the sustainable development of industries’ exports in emerging countries from a comprehensive perspective of multiple institutional environments and multi-dimensional industries’ heterogeneity. On the basis of defining institutional quality and industry heterogeneity, this paper explores the underlying mechanisms of institutional quality affecting sustainable development of industries’ exports and conducts empirical analyses by using the data from China’s 20 industries’ exports to 117 countries for the period of 1996–2011. The results show that: (a) Industries with higher degrees of financial dependence or higher product technical complexities have export comparative advantages in better financial environments; (b) Industries with higher research and development (R&D) intensity or a higher concentration of intermediate inputs have export comparative advantages in better legal environments; (c) The differences in the level of financial development or in the efficiency of legal system would influence the effects of interactions between institutional quality and industry heterogeneity on the sustainable development of industries’ exports. The present paper provides new evidence that institutional quality does promote the sustainable development of industries’ exports in emerging countries. These results indicate that exports of heterogeneous industries in emerging economies are an adaptive response to the specific institutional environment, as well as a continuous release of institutional dividends with the improvement of the institutional environment.

Institutional quality and internationalization of emerging market firms: Focusing on Chinese SMEs

With growing interest in institutional perspectives on emerging market firms (EMFs), scholars become increasingly interested in probing the role of home country institutions in their internationalization in either “escape” or “fostering” view. We contend that the two mechanisms should be interconnected and viewing them together will stake out promising territory for future research. Dividing the internationalization of Chinese small and medium-sized enterprises (SMEs) into two stages: internationalization decision-making and international development, we theoretically argued and empirically proved that institutional quality is negatively associated with the propensity of SMEs to go overseas but positively associated with their overseas sales growth. These effects were contingent on firm-level characteristics of manager's experience and possession of internationally-recognized certification. Based on stepwise analysis of SMEs at different phases of internationalization, we broaden the application of institutional theories in the context of emerging economies by bridging the dividing arguments of escape-fostering views on how the quality of domestic institutions exerts different impact on EMFs and especially Chinese SMEs in their international venturing at different stages.

The Cohesion Policy on the EU’s Eastern and Southern Periphery: Misallocated Funds?

The cohesion policy of the European Union has become its primary instrument promoting development in the peripheral member states. The enduring consequences of the 2007–2008 crisis and the economic governance agenda requiring fiscal discipline from the member states have raised the policy’s significance further. However, similar economic inequalities characterize the EU nowadays as several decades ago. The cohesion policy is by no means alone responsible for this, but the reasons for its ambiguous performance deserve further scrutiny. Empirical studies explain variation in fund performance with domestic institutional quality and absorption capacity, but the member states’ fund spending strategies have not been addressed so far. This is puzzling because they are important determinants of the economic effects of EU funds. The paper fills this gap by investigating the spending strategies of the Southern and the Eastern members in two recent programming cycles (2007–2013 and 2014–2020). Assessed on five expenditure categories, the paper reveals that physical infrastructure investments enjoyed priority over long-term growth-generating R&D and human capital projects and that the allocation of EU funds did not reflect domestic development needs.

Your war, my problem: How conflict in a neighbour country hurts domestic development

This paper explores the transmission mechanisms of the impact of civil conflict in the neighbourhood on the economic development of the domestic country. We study a set of endogenous relations linking growth and its fundamental causes, domestic conflict and conflict in the neighbourhood. Methodologically, we go beyond a reduced-form single equation model to estimate a system of four equations where neighbourhood conflict affects domestic civil conflict, institutions and economic integration. Civil conflict in the neighbourhood significantly increases the probability of domestic conflict, lowers the quality of domestic institutions, and reduces the degree of economic integration with the rest of the world. The dollar value of this damage cumulates over time depending on the frequency/duration of spatial conflict. Our simulations show that the cost to the domestic economy ranges between $506 and $14,165 in lost per-capita GDP over a period of fifteen years.

Natural resources, manufacturing and institutions in post-Soviet countries

We examine the effect of natural resource exports on economic performance during the 1996–2010 period in the 15 independent countries that formerly comprised the Soviet Union. After the fall of communism, these countries began to demonstrate marked differences from one another with respect to economic development and institutions, which has resulted in unique cross-sectional and time variation. Using several panel regression models that address endogeneity and clustering issues, our results suggest that natural resources crowd out manufacturing unless the quality of domestic institutions is sufficiently high.

Mixing Washington Consensus With Beijing Consensus and Corruption in Africa

In theory, trade intensity should positively affect the quality of domestic institutions and governance; the higher the economic openness, the lower the corruption. In practice, however, the growth of economic openness has not been accompanied by the expected improvements in corruption for 34 African countries between 1990 and 2009. This paper presents a plausible explanation for this conundrum. Results from panel data regression analyses indicate that a switch from trading with the advanced economies to trading with China increases the perceived corruption level. For instance, in a “representative” African country, a 10 percentage point substitution from trading with the advanced economies to trading with China makes its ICRG corruption score decline — indicating increased corruption — by 29 percent.

MIXING WASHINGTON CONSENSUS WITH BEIJING CONSENSUS AND CORRUPTION IN AFRICA

In theory, trade intensity should positively affect the quality of domestic institutions and governance; the higher the economic openness, the lower the corruption. In practice, however, the growth of economic openness has not been accompanied by the expected improvements in corruption for 34 African countries between 1990 and 2009. This paper presents a plausible explanation for this conundrum. Results from panel data regression analyses indicate that a switch from trading with the Advanced Economies to trading with China increases the perceived corruption level. For instance, in a “representative” African country, a 10% point substitution from trading with the Advanced Economies to trading with China makes its ICRG corruption score decline—indicating increased corruption—by 29%.

HUMAN CAPITAL, PERCEIVED DOMESTIC INSTITUTIONAL QUALITY AND ENTREPRENEURSHIP AMONG HIGHLY SKILLED CHINESE RETURNEES

Over the past two decades, returnee entrepreneurs have emerged as major promoters of business startups and entrepreneurship in China. Recognizing their positive impact in promoting new and innovative companies, Chinese national and local governments have instituted a raft of preferential policies aimed at assisting returnee entrepreneurs. Based on a survey of Chinese returnees and returnee entrepreneurship from 2011 to 2012, this paper examines how human capital and perceptions of domestic institutional quality affect entrepreneurial activity among highly skilled returnees. We find their educational levels, overseas work experience, the degree to which they bring back new business models and their perception of domestic economic opportunities affects the likelihood of such individuals becoming entrepreneurs. Our work suggests regulatory transparency discourages returnees from entering entrepreneurship, suggesting the relationship between regulatory transparency and entrepreneurial behavior is more complex than is portrayed in previous research done on this matter. The results of our analysis are robust against a number of rigorous statistical specification checks.

Extractive Institutions, Closed Borders and Economic Development

Autocratic regimes often limit access to information concerning the outside world, to prevent their citizenry from learning about the comparatively poor performance of their economy. In this paper, we analyze the use of censorship, and consider it as an information asymmetry problem, in the context of an augmented Solow growth model. We find that higher technological backwardness, lower quality of domestic institutions, low level of income inequality and low costs of collecting information about foreign economies lead to more restrictive and comprehensive censorship. These findings are consistent with stories of socialist dictatorships, as the Soviet Union or North Korea, where very restrictive forms of censorship, as political isolationism, were/are used. We also explain why these forms of censorship are less popular now. We argue that isolationism reduces opportunities for adoption of technologies, which results in underdevelopment, higher vulnerability to negative shocks, and potentially higher political turbulence. To avoid these outcomes, a political regime can prefer not to implement the most strict forms of censorship. This finding is in line with censorship policy which is applied in nowadays China.

Role of Institutional Quality in Determining the R&D Investment of Chinese Firms

AbstractThis study adds to the understanding of China's innovation prospects by examining how variations in institutional quality within China impact on the R&D efforts of firms located in different provincial regions. In the process of identifying the effect of institutional quality, the roles of other factors such as ownership types and market structures are revealed, which provides interesting insight into firms' R&D behavior. The key findings suggest that institutional quality positively affects the decision of firms to engage in R&D activities. Once firms start to engage in R&D, the subsequent expansion of firm‐level R&D intensity depends on factors such as market structure. Therefore, strengthening domestic institutional quality is the first critical step towards the goal of building a knowledge‐intensive economy in China. Efforts to nurture market development are also important for achieving this goal.

Domestic versus Multilateral Institutions in Bilateral Trade: A Comparative Gravity Analysis

The role of domestic and multilateral institutional variables in determining bilateral trade is estimated using recent cross-sectional data covering 192 countries. Linear estimations are conducted using lognormal and Tobit models while multiplicative models use Poisson and hurdle Poisson-logit estimators. The multiple indices of domestic institutional quality available are scaled into four categories using multidimensional scaling. Membership of trade and political organizations proxy for multilateral institutional heterogeneity. Count data models a report better model fit and conservative estimates compared with linear estimations. Domestic institutional quality has a significant but moderate association with bilateral trade while multilateral institutions have a substantially large and statistically significant association with trade.