Good Institutional Quality Research Articles

Family Involvement and Firm Performance: A Worldwide Study Unveiling Key Mechanisms

Prior literature establishes a link between family involvement and the firm financial performance. However, the mechanisms through which family involvement in a firm affects its financial performance in different institutional settings are largely unknown. Using an unbalanced panel of 3,322 listed firms from 32 countries over a 9-year period, we find that family involvement in ownership and management on average has negative effects on financial performance. Moreover, the negative effect of family ownership is less profound in countries with good institutional quality. We further find that R&D intensity partially mediates the negative relationship between family involvement and the firm financial performance, but the mediation effect is conditional on the degree of institutional quality in a country. These findings advance the family business, innovation, and institutional literature, and offer important implications for theory and practice.

Does capital flight set Africa as the seat of darkness? Linking capital flight and energy poverty

Despite the fact that capital flight is a scourge for African economies, no study, to the best of our knowledge, has analyzed its effects on energy poverty. This study aims to fill this gap in the literature by providing one of the first empirical studies of the effects of capital flight on energy poverty. The present study focuses on a panel of 30 countries in Africa over the period 2000–2018. We use Principal Component Analysis (PCA) to construct an energy poverty indicator. Results suggest that capital flight increases energy poverty in Africa. This result is robust when controlling for endogeneity. Additionally, good institutional quality helps mitigate the negative effects of capital flight on energy poverty. Further analysis allows us to identify income inequality, government spending and unemployment as the channels through which capital flight influences energy poverty. Policy wise, better control of capital flows based on appropriate institutional settings should reduce energy poverty in Africa.

Cross Country Study of Human Capital Formation and USFDI Inflows

Purpose: The neo-classical theory of economic growth features the positive impact of the human capital of an economy on its growth. The inflow of foreign direct investment is one of the main components to carry forward the growth effect, this study investigates the impact of country-specific institutional quality and human capital on the cross-country variations of US-Foreign Direct Investment (FDI) inflows. Our core hypothesis is that Countries with better Human capital will attract more FDI if they have good quality institutions in terms of less risk in investment opportunities. Method: Using a set of panel data of US-Foreign Direct Investment (FDI) inflows for both developed and developing countries over the period 1984-2021. Result: The country-specific quality of institutions reinforces the impact of human capital on the inflow of US foreign direct investment in this study. Using two-dimensional panel data we find strong support for our hypothesis using a two-way fixed effects model. Our results are robust to the alternative measures of institutional quality. Implications: The strength of our approach is that in contrast to the previous works (1) we have used the USFDI inflow across countries that have been widely neglected in the related literature and (2) emphasis has been given to the conditional or joint impact of human capital and country-specific institutional quality in determining the cross-country variations in USFDI inflows.

The mixed effects of innovation strategies and bribery on firm performance: A Re-investigation via institutional quality

While a large body of literature has explored the impacts of bribery on firm performance, particularly in terms of innovation outcomes, a significant gap exists in understanding the effects of innovation strategies on firms’ performance as well as the influence of institutional quality on the interaction between innovation strategies and bribery. This paper empirically addresses this gap by investigating the complex effects of bribing and two distinct innovation strategies—independent innovation and spillover innovation. Using global firm-level evidence from the latest Business Environment and Enterprise Performance Survey, we employ three semiparametric methods to estimate productivity as proxy of firms’ performance. Our results show that independent innovation exerts sanding influences on productivity, while spillover innovation and bribery grease the wheels of firm performance. Moreover, bribery and spillover innovation mutually amplify each other's positive effects on firm performance. Further examinations indicate that the impacts of innovation strategies and bribing are significantly moderated by institutional quality. Under poor institutional quality with excessive government control or corruption, the positive influence of spillover innovation and bribing tends to be strengthened. Conversely, good institutional quality mitigates the greasing effects of spillover innovation and bribery. Through multiple robustness tests employing alternative methodologies, firm performance metrics, and institutional quality measures, these findings are consistently confirmed.

Does Institutional Quality matter to the Inflation Targeting-Financial Stability Nexus?

Abstract This study examines the quality institutions role played in the inflation targeting- financial stability nexus. A sample of 65 developed and developing countries, including 33 inflation-targeting countries (10 developed and 23 developing), and 32 non-inflation-targeting countries (12 developed and 20 developing), during the 1996 - 2020 period. Using Two Step GMM estimation, results show that inflation targeting stimulates financial stability. This positive relationship between inflation targeting and financial stability is proved, regardless of the inflation targeting regime in place; Soft or Full-Fledged. Results from institutional quality variables prove that inflation-targeting countries with poor institutional quality are financially vulnerable, and that for good institutional quality are able to promote financial stability. JEL classification number: E4, E52, E58. Keywords: Inflation targeting, Financial stability, Developed and developing countries, Quality of institutions, Tow Step GMM System.

Institutional quality and public spending in Europe: A quantile regression approach

AbstractWe appraise the effects of institutional quality on public spending for a set of 27 European countries and 18 Euro‐area economies over the 1996–2017 period. While institutions play a weak role in affecting spending once the fixed‐effects model is employed, the application of the quantile regression indicates that improved institutional quality mitigates public spending, although the effects crucially depend on the distribution of public expenditure and the sample examined. For both the Euro‐area sample and the full sample, we show that better quality of institutions reduces public spending, although the effects become less significant the higher the levels of public spending. Further, for the Euro‐area sample, institutions appear to have a stronger role in mitigating public spending. Several robustness tests confirm our findings.

Corporate governance and risk management in Islamic and convectional financial institutions: explaining the role of institutional quality

PurposeThis study aimed at exploring the differential effects of different corporate governance (CG) indicators on risk management practices in Islamic financial institutions (IFIs) and conventional financial institutions (CFIs) of Pakistan. It also investigated the moderating role of institutional quality (IQ) in shaping the effects of CG practices on financial institutions of Pakistan.Design/methodology/approachA sample of 57 financial institutions including commercial banks, insurance companies and Modarba companies over the period 2006–2017 is used to carry out the empirical analysis. The authors applied the robust two-step system-generalized method of moments estimator, which is also called the dynamic panel data estimator. They also built the PCA-based composite index of CG and IQ by using different indicators to investigate the moderating role of IQ. They used three proxies for risk taking, five for CG and one for Shari’ah governance. To test the validity of the instruments, they applied the Arellano and Bond’s (1991) AR (1) and AR (2) tests and the J-statistic of Hansen (1982).FindingsThe results provided strong evidence that several individual characteristics of CG and the composite index are significantly related to the operational risk, the liquidity risk and the Z-score (a proxy for solvency risk). The results also revealed that IQ significantly and substantially contributes in reducing the level of risks. Finally, the estimation results indicated that the effects of CG on risk management are significantly different at IFIs and CFIs. This differential impact is mainly attributed to the fundamental differences in business models, operational strategies and contractual obligations of both types of institutions.Practical implicationsThe findings of this study are important for enhancing our understanding of how CG relates to risk taking in Islamic and conventional financial services industries and how good quality institutions are important for formulating the governance effects on the risk-taking behavior of financial institutions. The findings suggest that a suitable size of board should be chosen to manage the risk effectively. As the findings show that the risk-taking behavior of IFIs differs from that of CFIs, the regulators and international standard setting bodies should tailor the regulatory frameworks accordingly.Originality/valueThis paper is different from the existing studies in four aspects. First, to the best of the authors’ knowledge, this is the first empirical investigation in Pakistan, which does the comparison of IFIs and CFIs while examining the impacts of CG on risk management. Second, the paper constructs the composite index of CG by considering several different indicators of governance and examines the combined effect of governance indicators on risk management process. Third, this paper adds to the growing literature on the role of IQ by investigating whether it acts as a moderator between CG structures and risk management and if yes, then whether this moderating role is different for IFIs and CFIs. Finally, the paper builds upon the existing research work on the CG effects for different types of financial institutions by proposing a single regression based analytical framework for comparing the effects across two different types of institutions, harvesting the benefits of higher degrees of freedom and avoiding/minimizing the measurement error.

Foreign Assistance, Institutional Quality and Economic Growth in Selected Sub-Saharan African Countries: 1990 – 2021

This study adopts the Augmented Mean Group (AMG) estimator to analyse the impact of institutional quality and foreign assistance on economic growth in Sub-Saharan African countries, using time series data sourced from the World Bank Development Indicators (WDI) and World Bank Governance Indicators (WGI) for the period 1990 to 2021. The study went a step further to determine whether there is a significant interactive development effect of foreign assistance and institutional quality in sub-Saharan African countries. The results show that foreign assistance has a positive conditional marginal effect on per-capita GDP, institutional quality has a positive conditional marginal impact on per-capita GDP and their interaction is also positive. The results are all statistically significant at 10% level of significance. Thus, foreign assistance and good quality institutions improves economic growth. This does not imply that; sub-Saharan African region should heavily rely on foreign assistance, without putting in place specific developmental efforts. Thus, it is opined that policymakers should regulate the allocation of foreign assistance and improve the quality of institutions. In doing so, the production capacity of the region would increase and the region would attract huge amount of foreign direct investment (FDI). Consequently, there would be a distinction between the amount of foreign assistance needed to lessen poverty and the levels of foreign assistance required to achieve economic growth. Keywords: Foreign Assistance; economic growth; AMG Estimator, CCEMG Estimator, Institutional Quality and Sub-Saharan Africa DOI: 10.7176/JESD/14-8-07 Publication date: April 30 th 2023

Institutional quality’s influence on financial inclusion’ impact on bank stability

Using the Generalized Method of Moments (GMM), this study examines the influence of institutional quality on the impact of financial inclusion on the stability of 157 banks in 8 ASEAN countries from 2010 to 2020. The results show that financial inclusion negatively hurts bank stability, and this effect will be improved if it is implemented in an environment of good institutional quality. This is verified again in terms of institutional quality aspects. Corruption control, political stability, government efficiency, and the rule of law have positive effects, while regulatory quality has negative effects. The results are consistent across all three measures of bank stability, Zscore, standardized Zscore, and non-performing loans (NPL). With the above results, the study recommends that national governments take steps to improve institutional quality to increase the stability of banks in promoting financial inclusion.

A regional appraisal of electricity accessibility determinants: the relevance of international remittances, clean energy, income inequality, and institutional quality.

The majority of developing nations worldwide face severechallenges in ensuring universal electricity access for their respective populations. Hence, this study focuses on assessing the factors stimulating and inhibiting national electricity accessrates in 61 developing nations from six global regions during the 2000-2020 period. For analytical purposes, both parametric and non-parametric estimation techniques that are efficient in handling major panel data-related problems are used. Overall, the results reveal that a higher influx of remittances sent by the expatriates does not directlyinfluence electricity accessibility. However, adoption of clean energy and improvement in institutional quality promote electricity accessibility while higher income inequality undermines it. More importantly, good institutional quality mediates between international remittance receipts and electricity accessibility as results endorse that international remittance receipts and institutional quality improvement jointly exert electricity accessibility-promoting impacts. Moreover, these findings depict regional heterogeneity while the quantile-based analysis highlights contrasting impacts of international remittance receipts, clean energy use, and institutional quality across different quantiles of electricity accessibility. Contrarily, worsening incidences of income inequality are evidenced to undermine electricity accessibility across all quantiles. Therefore, considering these key findings, several electricity accessibility-boosting policies are suggested.

English

This study examined the impact of bilateral and multilateral aid on domestic savings of SSA countries, taking into account the role of institutional quality. A balanced panel data set consisting of 28 SSA countries from 1996 – 2015 was used. Random effects techniques were also used. Bilateral aid was found to have negative significant impact on domestic savings of SSA countries, reflecting a crowding-out effect; while the impact of multilateral aid on domestic savings of SSA countries was found insignificant. When the bilateral and multilateral aid variables were interacted with institutional quality, the coefficient of interaction between bilateral aid and institutional quality was insignificant, while that between multilateral aid was positive and significant, implying that the impact of multilateral aid on domestic savings depends on good quality institutions. Therefore, bilateral aid is a disservice to SSA countries since it crowds-out domestic savings regardless of institutional quality; however, multilateral aid can be beneficial to SSA countries if good quality institutions exist.   Key words: Bilateral aid, multilateral aid, domestic savings, Sub-Saharan Africa.

Corporate Governance and Information Asymmetry

The financial industry is regarded as the backbone of the economy, and good corporate governance is critical to its smooth operation. Keeping in view the importance of corporate governance, this study aims to empirically investigate the impact of corporate governance on information asymmetry with moderating role of institutional quality of Islamic and conventional financial institutions. We used unbalanced panel data from 2006 to 2017 of 49 financial institutions including commercial banks, insurance companies, and Modaraba companies. A two-step system-Generalize Method of Moments (GMM) estimator is used to mitigate the endogeneity problem. Corporate governance of Conventional Financial Institutions (CFIs) is significantly related to information asymmetry however, the board size, and board composition of Islamic Financial Institutions (IFIs) are insignificant with asymmetric information index (AII). Further, the size of the shari’ah board is negatively and significantly related to AII. Institutional Quality (IQ) is significantly contributed toward the reduction of information asymmetry and plays a role as a moderator. Further, the impact of corporate governance on IFIs and CFIs differs due to the nature and contractual relationship of the parties and the institution’s type. The results of the study reveal that good quality institutions are important for corporate governance structure and the reduction of information asymmetry in financial institutions.

Impact of Bilateral and Multilateral Aid on Economic Growth in Low and Middle-Income Sub Sahara African Countries: Mediating Role of Institutional Quality

The purpose of the study was to compare the impact of bilateral and multilateral aid on economic growth in middle and low-income Sub Sahara Africa (SSA) countries, and determine whether the impact is contingent on institutional quality. The study relied on panel data from 28 SSA countries from 1999 – 2015. Countries were grouped into middle and low-income countries following the World Bank classification, and a dynamic model was specified and estimated for both categories of countries using the technique of system GMM. After accounting for the differences in levels of economic development, the results showed that only multilateral aid had a positive and significant effect on economic growth in both middle and low-income countries, and that the impact is contingent on existence of good quality institutions. The study therefore recommends that donors should focus more on advancing aid through multilateral channels, and that governments of SSA countries—both middle and low-income—should focus on strengthening the quality of their institutions if they are to maximize value from multilateral aid. 

Does Governance Wax or Wane the Bilateral Trade of Pakistan? An Application of Gravity Model


 
 
 
 Purpose: This paper aims to present an analysis on the effect of governance and its indicators on bilateral exports and bilateral imports of Pakistan with its major trading partner countries separately.
 Theoretical framework: This study has implemented the six indicators of governance for Pakistan and its exporting and importing partners in gravity trade model to demonstrate the influence of governance on bilateral trade.
 Design/methodology/approach: Indicators of governance (a disaggregate analysis) and a governance index (an aggregate analysis) in a panel data over the period 2000 to 2020 have been analyzed by using panel least square estimation technique.
 Findings: The findings reveal that the average effect of governance on bilateral exports is positive indicating that in general, the better quality of institutions boosts up the bilateral trade, and the outcome of the institutional quality on trade has “waxed rather than waned” with time. Further, the positive effect of governance on bilateral imports indicates that it is uncomplicated to trade with those trading partners having better institutions.
 Research, Practical & Social implications: Research, Practical & Social implications: This study suggests that there is a clear need to adopt the practices of good governance,accountability, rule of law, etc. for enhancing bilateral trade and would follow the rules developed by the institutions.
 Originality/value: This study is an attempt to examine the significance of governance in enhancing the bilateral trade of Pakistan. Findings of the study has elaborated with the economic reasonings that have never been explained in previous researches.
 
 
 

Has the sustainable development goal of reducing the proportion of youths not in education, employment or training by 2020 been met in Africa?

ABSTRACT The consequences of growing up deprived of critical resources vital for well-being and human development jeopardises the fulfilment of potential in the lives of youths, thereby creating hurdles in access to education, training or the labour market, consequently leading to higher rates of youths that are not in education, employment or training (NEET). Sustainable Development Goal (SDG) 8, Target 8.6 aimed to substantially reduce the proportion of NEET by 2020. This study aims to find out if the SDG’s target of substantially reducing NEET by 2020 was fulfilled in Africa. If not, what are the factors affecting NEET in Africa? Descriptive statistics, Ordinary Least Squares and Two-Stage Least Square methods have been used. Results indicate that Africa stalls behind and is far from reducing NEET. Self-employment is the highest employer of youths and conversely exacerbates the rates of NEET. Gender parity index, access to the internet and irrigation services reduce NEET rates. Good institutional quality is critical because institutions are policymakers and service providers. Policies should support literacy, entrepreneurial and digital skills training to boost self-employment. Child marriage should be prohibited. Youths can be supported by securing funds from indirect taxes. Policymakers should work closely with youths to understand their needs and capacities.

The impact of quality of institutions on firm performance: A global analysis

This study contributes to the literature as few studies discuss how different aspects of institutional quality influence firm performance. We use 133,945 observed values for 16,523 firms in 41 countries to examine whether better institutions can help increase corporate value by improving enterprises' total factor productivity (TFP). Empirical findings indicate that enhanced institutional quality can increase TFP and firm value, and political institutional quality has the highest positive impact on firm value and technological progress. Moreover, good institutional quality can promote firm value by improving enterprises’ TFP. To increase firm productivity and value, governments must build better institutions to help create a better investment environment, strengthen resource allocation efficiency, and reduce corruption.

Global diversification, host-country environments, and corporate philanthropic giving: Evidence from Chinese multinational corporations

Previous studies suggest that multinational corporations (MNCs) are likely to participate in more philanthropic activities because these activities could facilitate their operation in host countries. Focusing on a sample of Chinese MNCs between 2006 and 2019, this study investigates whether more diversified firms have higher corporate philanthropic giving (CPG), and the moderating effect of host-country environments. The results indicate that there is not a significant relationship between firm's global diversification and CPG. Nonetheless, we find that a host country's cultural distance, institutional quality and country risk negatively moderate the global diversification–CPG relationship, while a host country's economic growth positively moderates this relationship. Our findings suggest that although global diversification increases the incentives for Chinese firms to engage in philanthropy, it also constrains on their involvement in such activities. Furthermore, the precise effect of global diversification on a firm's CPG is conditional on the environment of its host country, and the host country that has large cultural difference to home country, good institutional quality, high risk and bad economic prospect leads to decrease in MNCs' CPG. Our study provides new evidences for the determinants of CPG in MNCs from emerging markets.

International Fund Allocation under Economic Policy Uncertainty Shock

Abstract This paper focuses on the impact of economic policy uncertainty on international asset allocation and international capital flows. Our results show that economic policy uncertainty shocks have a negative impact on the international asset allocation, which can be explained from the real economic activity channel and the expectation channel. We also explore a full fledge of country level heterogeneities about the economic policy uncertainty shocks on international asset allocation. Specifically, good institutional quality, transparent information, good information access to the international financial market and bilateral informational link help to alleviate the negative effect that economic policy uncertainty shock does to asset allocation. And a healthy public and external sector also help to alleviate the negative effect. While the importance of government in the economy amplifies the negative effect of economic policy uncertainty shocks to asset allocation. JEL classification numbers: E44, G11, G15. Keywords: Economic policy uncertainty, Global fund allocation, Institutional quality, Global imbalance.

Research methods in economics and its implications for capital formation

We explore whether public or private capital augments or obstruct Foreign Direct Investment (FDI) inflows by decomposing Domestic Capital Formation (DCF) into private and public capital formation. To this end, we apply Cross-Sectional Autoregressive Distributed Lags (CS-ARDL) approach to analyze panel time-series data. Our empirical results show that public capital crowds in FDI inflows while private capital crowds out FDI inflows. However, institutional quality significantly attracts FDI inflows for less developing economies. We argue that private and public capital possess different attributes; thus, clubbing them together might result in aggregation bias. We observe a strong connection of good institutional quality with private and public capital to augment foreign capital inflows for developing countries in the long run. Besides, our empirical results suggest that returns are high with quality institutions, especially for developing regions. Our result estimations provide several policy implications.

Rules, institutions, or both? Estimating the drivers of telecommunication investment in Latin America

ABSTRACT This paper analyses the impact of regulation and institutions on telecommunications investment in Latin America. The investment levels of the region lag behind those of advanced economies and are impeding substantial progress on digital transformation. Using a database built for this analysis, which covers nearly 90 percent of Latin American countries for 2007–2017, we confirm the relevance of regulatory and institutional frameworks to explain investment trends in the sector. We also show that a good institutional quality contributes significantly to counteracting partially a bad regulatory environment, and vice versa. However, the impact is significantly stronger when good regulation and institutions interact, suggesting that comprehensive reforms to improve institutions and the regulatory environment would pay off. In particular, improving cybersecurity and piracy control regulation, and fighting corruption and undue influence stand out as the priorities to increase telecommunication investment in Latin America.