Level Of Institutional Quality Research Articles

The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs

The average cost of borrowing on international financial markets varies widely from nation to nation even after controlling for the varying levels of indebtedness of their governments. This suggests that markets assign country specific default risk assessments. In this paper we focus on one natural source of this difference – the quality of their institutions. We begin by showing that the average sovereign spread is positively related to the average percentage of a government contract that must be given as a “gift” in order to secure the contract. We then build a sovereign default model where the government is constrained to use corrupt bureaucrats to deliver public goods and services and manage its accounts. Using the gift data as a measure of the public resources diverted by bureaucrats, and the Rule of Law index as a measure of institutional quality, we estimate the diversion policy of bureaucrats and use it to calibrate our model to international data. We use the model to generate an artificial international data set where countries vary only in the institutional quality parameter. Running the same regressions on our artificial data, we find that average spreads are positively associated with the bribe (gift) rate and with average debt levels. The model implies that when revenue streams are low, a benefit of default is that public services net of bureaucratic diversion actually increase. Since the net gain in public services obtained by defaulting is decreasing in the level of institutional quality, international lenders assign lower default risk to those countries.

Institutional Quality and its Impact on FDI Inflow: Evidence from the EU Member States

The aim of the article is to assess institutional quality in 28 EU Member States and to examine the relationship between the quality of institutions and FDI inward stock as % of GDP. This study is structured as follows. Firstly, we reviewed studies dedicated to the relationship between institutional quality and investment attractiveness. Then, we discussed FDI inflow into the EU countries and selected diagnostic variables that later served as the basis for our research in which we used categories of the Global Competitiveness Index. Based on rankings and using statistical methods, in the next stage, we divided the EU Member States into groups representing similar institutional quality. Then we investigated the relationships between groups of countries similar to one another when it comes to institutional quality and groups of countries ranked in ascending order by the value of foreign direct investment inflow measured as FDI inward stock as % of GDP.
 The study demonstrated that the EU Member States differ with respect to institutional quality. The results of the statistical analysis have provided grounds to positively verify the hypothesis about a positive relationship between the level of institutional quality and investment attractiveness.

China’s outward FDI and environmental sustainability in belt and road countries: does the quality of institutions matter?

This study aims to unravel the environmental effects of institutional quality in relationship with China’s Foreign Direct Investment (FDI) in Belt and Road Initiative (BRI) countries. The empirical analysis is conducted over the period 2003–2018, using the System-GMM approach with the Windmeijer finite-sample correction. We infer that China’s FDI has a detrimental effect on environmental quality, which validates the ‘pollution haven hypothesis’ in the BRI region. Importantly, the interaction effect of China’s FDI with indicators of institutional quality yields negative and significant results. This entails that strong institutions can boost the quality of the environment through FDI attractiveness. In further assessment, the threshold levels of institutional quality are calculated, beyond which China’s FDI can reduce carbon emissions in the BRI region. This substantiates both the pollution haven and pollution halo hypotheses. The study underscores the importance of institutional reform in the quest for sustainable development, owing to the fact that most economies prioritize FDI-led growth strategies.

Currency Union and Regional Trade Integrations in West Africa: The Role of Institutional Quality

This study investigates the effect of currency union on intra-regional trade integrations in West Africa. The empirical analysis also examines the interaction effect of institutional quality on currency union-trade flows nexus in the West African region over the period of 1996 - 2019.The study employs a Driscoll-Kraay standard error estimator technique on data obtained from the IMF direction of trade statistics and World Bank governance indicators. The study findings suggest that all the gravity variables (Gross domestic product, population, and distance) are in line with a priori expectations; currency union dummy produced a positive association with intra-regional trade integrations; real effective exchange rate appreciation boosts trade performance, and the interaction of currency union and institutional quality produced a positive impact on intra-regional trade flows among the countries in the West African region. Among the disaggregated institutional quality index, the rule of law and political stability have a significant impact on trade flows. The rule of law influenced trade flows positively, while political stability influenced trade flows negatively. The study concludes that the Rose effect of a common currency on trade exists in West Africa and that the level of institutional quality also subscribes to the currency union trade flows relationship.

Moderating Effect of Institutional Quality on Relationship Between Foreign Aid and Economic Growth in Africa

Africa has received considerable amounts of external aid over the last two decades without significant improvements in socio-economic conditions on the continent. This study, therefore, examines the effects of foreign aid on growth in Africa, and how institutional quality can moderate these effects. The study used the system generalized method of moments estimation technique and a panel of forty-two African countries over the period 2010-2018. Interestingly, the study established that even though foreign aid impacts negatively on growth in Africa, improving the quality of institutions on the continent can reverse this negative effect. In fact, the study computed a threshold value of institutional quality beyond which foreign aid would be a blessing to Africa. This implies that for foreign aid to contribute meaningfully to growth in Africa, the quality of institutions should improve beyond this threshold. Unfortunately, the average level of institutional quality in Africa is presently below this threshold. The study concluded that policymakers in Africa should take urgent steps to strengthen the quality of institutions on the continent as a means of exploiting the continent's huge foreign aid to drive growth and reduce the excruciating effects of poverty plaguing more than half of its population.

Economic Growth Effects of Public and Private Investment: Evidence from Dynamic Panel Estimation for Developed and Developing Countries

We examine the growth effects of public and private investment by using data for a large sample of countries. For the full sample, our dynamic panel estimations indicate that both public and private investment have strong positive effects on growth. Our estimations for income levels also show that the impacts of both public and private investment are positive and statistically significant for developing countries. Interestingly, public and private investment promote growth in developing countries with effective and ineffective governments. It seems that countries can significantly benefit from investment regardless of their institutional quality levels. Furthermore, the effect of public investment generally appears to be larger than that of private investment. Given the robust relationship between investment and growth in both ineffective and effective developing countries, an important policy implication of our study is that both types of investment should be encouraged to foster economic growth.

Public debt, institutional quality and growth in sub-Saharan Africa: a threshold analysis

ABSTRACT Using data for 44 sub-Saharan African countries, this study analyzes the effect of public debt on economic growth and assesses whether institutional quality matters for this effect. The results indicate that, while an increase in public debt has a negative impact on economic growth, this effect is dampened when there is an increase in the quality of institutions as captured by an anti-corruption perception indicator or a government effectiveness indicator. Further, the findings indicate that there is a level of institutional quality above which the effect of an increase in public debt on growth is positive. Ergo, a decline in corruption as well as the perception effect that it engenders, and an improvement in the quality of policymaking should eliminate some of the inefficiencies characteristic of governments in the sub-region and facilitate a positive impact of debt on growth.

An empirical analysis of government interventions in ECOWAS: evidence from dynamic panel threshold

Purpose The study examines whether the growth effect of government spending is contingent on the level of institutional environment prevalent in Economic Community of West African States (ECOWAS). Design/methodology/approach The study adopts the more refined and more appropriate dynamic threshold panel by Seo and Shin (2016) and made applicable be Seo et al. (2019). The technique models a nonlinear asymmetric dynamics and cross-sectional heterogeneity simultaneously in a dynamic threshold panel data framework. Findings The results show that there is a threshold effect in the government spending-growth relationship. Specifically, the authors found that the impact of government spending on economic growth is positive and statistically significant only above a certain threshold level of institutional development. Below that threshold, the effect of government spending on growth is insignificant and negative at best. The findings suggest that government spending-growth nexus is contingent on the level of Institutional quality. Originality/value Unlike previous studies that adopt the linear interaction model which pre-impose a priori conditional restrictions, this study adopts the dynamic threshold panel framework which allows the lagged dependent variable and endogenous covariates.

Financial inclusion, bank ownership, and economy performance: Evidence from developing countries

This study analyzes financial inclusion and bank ownership structure's macro impact, using data from 44 developing countries over 2004-2017. Although foreign bank participation enhances the banking sector's efficiency, the benefits decline with circumscribed and exclusory intermediation, resulting in reduced per capita GDP and output growth. Use of and access to financial services and products, including ATMs availability and depositor accounts, positively impact economic performance. To positively impact the economy, financial inclusion and bank ownership require a minimum level of institutional quality.

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

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.

Natural Resources, Institutional Quality and Financial Development in GCC Member Countries: Visiting ‘Resource Curse Hypothesis’ by DCCE Estimation

The main purpose of the study is to check whether natural resource rent affects the financial development or supporting the resource curse hypothesis by employing a recently developed estimation technique by Chudik and Pesaran (2015) from 1985 to 2017 in GCC member countries. The novelty of this methodology is to consider structural breaks and the heterogeneity issues that are common in panel data. The results of DCCE estimates are in support of the resource hypothesis that natural resource rent hurt financial development. Additionally, this study takes moderation of institutional quality to check the threshold point or turning point where the natural resource rent effect becomes positive. Our results of interaction term postulate that a higher level of institutional quality mitigates the adverse effect of natural resource rent on financial development. The study results recommend the policy of natural resource rent in the presence of high institutional quality should continue because it improves the financial development in GCC member countries.

Is the Platinum Rule credible? An examination of other-regarding perceptions and attitudes toward unethical behavior

This paper uses data for 53 countries from the World Values Survey in a multilevel regression analysis that seeks to disentangle individual, institutional and other-regarding factors affecting ethical decision-making. The dependent variable is an index of how intolerant people are of unethical conduct. The explanatory variables indicate the perceived trustworthiness and fairness of others. Controls include variables for individual and institutional factors. Findings are that perceptions of trustworthiness in people unknown to them and perceptions of fairness in others correlate with a greater tolerance of unethical behavior, especially in countries with moderate levels of institutional quality. High institutional quality moderates the negative relationship between perceptions and ethical attitudes. The findings confirm the relevance of other-regarding factors and reinforce the importance of quality institutions in supporting ethical decision-making.

The moderating role of institutional quality in shadow economy–pollution nexus in Nigeria

PurposeThis study examines the moderating role institutional quality plays in shadow economy–environmental pollution nexus in Nigeria between 1984 and 2018. Further, the study also determines the threshold level of institutional quality that lessens shadow economy and abates environmental pollution.Design/methodology/approachShadow economy is measured as a percentage of gross domestic product (GDP) using the currency demand approach while environmental pollution is proxy by carbon dioxide (CO2) per capita. Autoregressive distributed lag (ARDL) is used as the estimation technique.FindingsResults from the study show that shadow economy has a positive and significant effect on environmental pollution both in the short and long run, while institutional quality has a negative effect on environmental pollution. This reveals that shadow economy worsens environmental quality while institutional quality abates environmental pollution. The interactive term of shadow economy with institutional quality has a negative but insignificant effect on environmental pollution in the long run. It implies that institutional quality is weak to bring about significant reduction in shadow economy and environmental pollution. Further, the threshold level of institutional quality required to lessen the effect of shadow economy and abate environmental pollution is found to be 5.69 on an ordinal scale of 0–10.Practical implicationsInstitutional quality in Nigeria is weak and needs to be strengthened up to the threshold level in order to effectively moderate the impact of shadow economy on environmental pollution.Originality/valueThe study addresses the perceived gap in the empirical literature on the emerging role of strong institution in abating environmental pollution in Nigeria. It also develops a threshold level of institutional quality capable of mediating the negative impact of shadow economy on environmental pollution. This empirical contribution is largely missing in the context of Nigeria.

Is the Golden Rule Still Golden? Fairness Perceptions and Attitudes Toward Unethical Behavior

This paper uses data for 53 countries from the World Values Survey in a multilevel regression analysis that seeks to disentangle individual, institutional and other-regarding factors affecting ethical decision-making. The dependent variable is an index of how intolerant people are of unethical conduct. The explanatory variables indicate the perceived trustworthiness and fairness of others. Controls include variables for individual and institutional factors. Findings are that perceptions of trustworthiness in people unknown to them and perceptions of fairness in others correlate with a greater tolerance of unethical behavior, especially in countries with moderate levels of institutional quality. High institutional quality moderates the negative relationship between perceptions and ethical attitudes. The findings confirm the relevance of other-regarding factors and reinforce the importance of quality institutions in supporting ethical decision-making.

The role of institutions at the nexus of logistic performance and foreign direct investment in Asia

Foreign Direct Investment (FDI) plays an important part in the economic growth of developing Asia and logistics capability is a crucial factor in FDI location choice. Till today, research investigating Logistics Performance (LP) and FDI in Asia are still lacking and rather inconclusive and not standardised. Using a total of 31 Asian countries covering 2007 through 2017, the study critically investigates the impact of LP on FDI using static panel regression method. The results demonstrate that while LP significantly impact FDI, there is a threshold effect of institutional quality in the LP-FDI relationship. Specifically, this paper found that the impact of LP on FDI varies across the perceived level of institutional quality i.e., the effect is positive only before certain threshold level of institutional quality, after which the effect of LP on FDI is reversed. This finding suggests that the LP-FDI nexus is contingent on the perceived level of institutional quality, thus supporting the idea that innovations (i.e., creativity and flexibility embedded within a sound institutional framework) is potent in delivering long-run LP-FDI development in Asia.

Environmental protection in selected one belt one road economies through institutional quality: Prospering transportation and industrialization.

The effects of economic development on natural environment is explored by momentous literature, this study focuses on exploring the role of institutional quality for environmental protection in the selected One Belt One Road (OBOR) economies. The main goal of the paper is to find the threshold level of institutional quality that may minimize CO2 emissions in the atmosphere due to widespread industrialization and transportation. The data is selected for the panel of 33 OBOR economies over the time period of 1986–2018. The panel threshold regression technique is applied to determine the threshold level of institutional quality. The estimated results of the study reveal that 2.315 is the threshold level of institutional quality in selected partner OBOR countries. If quality of institutions is above the threshold level then CO2 emission do not contribute significantly for environmental deterioration in spite of growing industrialization and transportation and vice versa. The study emphasized to improve the institutional quality up to threshold level to get potential gains from industrialization and transportation.

Success in completing cross‐border acquisitions by emerging market firms: What matters?

AbstractWhile cross‐border acquisitions (CBAs) by emerging market firms (EMFs) have grown rapidly in recent years, many have failed to bring the acquisitions to completion. Compared with acquisitions initiated by acquirers from developed economies, little is known about the possible determinants of completion or abandonment of CBAs conducted by EMFs. This paper investigates what contributes to the successful completion of CBAs by EMFs. Based on data of 637 announced CBAs by Chinese firms during 2000–17, we find that investing firms’ self‐learning experience from previous acquisitions can significantly increase the completion rate of subsequent related CBAs, while their industrial spillover experience helps raise the completion rate of unrelated CBAs. Our findings also show that the value of acquisition experience is significant only when the target firm is domiciled in countries with comparable level of institutional quality. Our results provide new insights into the complexity of the global M&A market and lessons for EMFs intending to conduct CBAs in the future.

The Role of Financial Development and Institutional Quality in Remittance-Growth Nexus in Asia

Workers' remittances represent up to 47 percent of gross domestic product in some Asian countries. Also, workers' remittances to the Asian region were estimated to reach $256 billion out of $483 billion received by developing countries. However, the growth effect of workers' remittance in Asia has, over the years, remained an open empirical question. To this end, this study examines the impact of workers' remittance and its interactive effects with financial development and institutional quality on economic growth. The study used a partial Gram-Schmidt orthogonalization procedure, which enable us to examine whether the marginal effect of workers' remittances depends on the degree of financial development and institutional quality. It also used a Pooled Mean Group (PMG) estimator on panel dataset for a period of 1984-2010 from fifteen (15) remittance-receiving Asian countries. The results of this study shows that, workers' remittance impacts positively on economic growth in remittance-receiving Asian countries. But, the growth effect is higher in Asian countries with improved financial development but relatively weak institutions. According to the findings a percentage point increase in per capita workers' remittance leads to a long-run increase in per capita income by 0.103 percentage points. Moreover, the marginal effect of workers' remittance on economic growth rises with increase in the degree of financial development. But it declines with improvement in institutional environment. The partial derivative of economic growth with respect to workers' remittance at the mean level of financial development is 9.733. Similarly, the derivative evaluated at the minimum and maximum levels of financial development are found to be 1.355, and 32.087 respectively. The proportions of these derivatives at different levels of financial development showed that the marginal growth effect of workers' remittances rises with increase in the degree of financial development in remittance-receiving Asian countries. However, the partial derivative of economic growth with respect to workers' remittance at the mean level of institutional quality is –12.068. But, the partial derivative computed at the maximum and minimum levels of institutional quality take the value of –15.945 and –6.785 respectively. This suggests that the better institutional environment is in a country the lesser will be the growth impact of workers' remittance. Overall, the result suggests that workers' remittance and financial development work as complements in enhancing economic growth. However, the former and institutional quality act as substitutes in promoting economic growth.

Does Globalization Asymmetrically Affect CO2 Emissions in Pakistan? A New Evidence through NARDL Approach

The study examines the impact of globalization and institutional quality on environmental degradation in Pakistan. The study employs symmetric and asymmetric Autoregressive Distributed Lag Model (ARDL) at a time to check the linear and nonlinear effect of globalization on the environment over 1985 to 2017. The long-run findings of linear ARDL shows globalization affect positively to the environment and all other control variables FDI, GDP are significant with a positive sign while institutional quality and the interaction term of globalization and institutional quality is significant with a negative sign. The study also finds the marginal effect of interaction term and found that globalization has a different effect on the environment with different level of institutional quality. The linear ARDL model is not suitable to check the asymmetric behaviour of globalization on the environment. For this, the study applied a nonlinear ARDL estimation method. The findings of the nonlinear ARDL model showed the asymmetric behaviour of globalization on the environment. This study provides a new direction by proving the asymmetric relationship of globalization on environment quality that is more beneficial for policymakers and government officials.

Nonlinear Threshold Effects of Institutional Quality on Capital Flight

Over the years, capital flight is a major concern for the countries where institutional quality is severely deficient. Almost all the literature emphasized the role of institutional quality on development. However, a possible question still remains unsettled what would be the optimum or threshold level of institutional quality that would create a milieu of least possible capital flight. The purpose of this study is to find the threshold value of institutional quality indicators and its impact on the capital flight of Bangladesh. Using the ICRG and WGI governance data over the period 1989 to 2016, the nonlinear regression proved that up to certain threshold level of institutional quality, interest rate differential reduces while economic growth stimulates net capital flight (NCF) of Bangladesh. Additionally, up to a certain threshold, level of corruption and interest rate differential lower NCF while beyond that level no effect exists. However, none of those independent variables affects NCF whenever the role of government stability threshold is considered.