Local Institutional Quality Research Articles

Pandemics, Local Institutional Quality, and Corporate Dividend Policy

ABSTRACT In this study, we explored the repercussions of contemporary health pandemics on dividend policies. We examined 115,393 firm-year observations spanning 39 countries and 6 notable pandemics: SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014), Zika (2016), and COVID-19 (2020–2021). Our analysis revealed a significant positive impact of pandemics on dividend policies. The robustness of the results was verified using analytical methods. Our conclusions remained stable even after accounting for endogeneity concerns by employing two-stage least squares and the generalized method of moments. Furthermore, our findings underscored the pivotal role of local institutional quality, particularly during pandemics.

The role of local institutional quality for the digital and environmental transitions in Italy

In this paper we analyze the effect of institutional quality on the so-called Twin transition at provincial level in Italy. To carry out the analysis, we use two proxies for the ecological transition, namely waste management and air pollution, and two proxies for the digital transition, namely ultra-wide band connections and provincial innovative start-ups. All the models are estimated on a panel of 103 provinces with a time dimension that varies for the different dependent variables. We employ Spatial Durbin Model estimator to take into account spatial dependence across provinces. Our findings indicate that the quality of local institutions may have an important role for the ecological transition, but not for the digital transition. Higher levels of institutional quality increase the performance in waste management and reduce the level of local air pollution. Conversely, the estimated coefficient of institutional quality is not statistically significant neither for ultra-wide band nor for innovative start-ups. Institutional quality turns to be significant but negative for the digital transition when dummy variable controlling for the presence of science-oriented university is added in the model specification. These results confirm that the green transition is largely policy-driven and the local ‘institutional environment’ is an essential ingredient for its effectiveness. The driving forces of the digital transition, instead, can be better found in socio-economic factors that depend on the ‘economic quality’ of the local system and its propensity to innovate within larger-scale innovation trajectories.

Exploring the corruption‐inefficiency nexus using an endogenous stochastic frontier analysis

AbstractSeveral scholars report that, due to reverse causality, the endogeneity problem makes it difficult to identify the real effect of institutional factors at the local level, such as corruption, on firm efficiency. This study employs a panel stochastic frontier analysis that endogenizes production efficiency and robustly assesses the effect of corruption at the local level on firms' technical efficiency. We analyze a large panel of Italian firms operating in the building sector from 2013 to 2019 showing that the determinants of local institutional quality affects firms' performance, with the rule of law and control of corruption playing a preeminent role. Controlling for endogeneity, the magnitude of the effects of institutional quality factors at the local level significantly increase. Our findings are robust to alternative IV strategies, alternative specifications of the production function, and the inclusion of other factors that may affect firm efficiency.

Institutional quality, economic development, and the sustainable outcomes of PPP projects: An empirical analysis of failed PPP projects in China from 2014 to 2020

The trajectory of China's PPP market since 2014, characterized by rapid expansion and a high failure rate, now plunges into a state of limbo and uncertainty. Through a quantitative analysis of failed PPP projects in China from 2014 to 2020, this study investigates the impact of local government institutional quality, private capital business environment, local economic development, and local fiscal affordability on the development and implementation of PPP projects. The findings reveal that larger government size is associated with a higher likelihood of PPP project failure, while a favorable private capital business environment can mitigate the failure rate of local PPP projects. Furthermore, empirical results demonstrate a positive relationship between local fiscal affordability and the success rate of PPP projects. The analysis underscores the significant influence of the institutional environment on the effectiveness of PPP projects and provides policy recommendations for local governments to enhance the business environment and other key factors contributing to the resilience of PPP projects.

Epidemics, local institutional quality, and corporate cash holdings

The increase in corporate cash holdings, particularly in the U.S., has garnered significant attention from academia, the popular press, and policymakers. While most existing studies explain this trend using endogenous microeconomic measures, there is limited empirical evidence of what may have caused corporate cash holdings to decrease. From a macroeconomic perspective, this study provides the first examination of the effects of exogenous health epidemics and local institutional quality on corporate cash holdings, using a large and unique international dataset of 380,966 companies from 39 economies. The analysis reveals a decrease in corporate cash holdings during epidemics, particularly in countries with higher local institutional quality, as indicated by their financial regulatory and governance capacity. This study conducts a robustness test, and the findings underscore the importance of local institutional quality, particularly during epidemics.

Local Government Expenditures, Institutional Quality and the Inclusive Economic Development Index (Iedi) in Indonesia

The purpose of this study was to determine the effect of local government spending and institutional quality on the inclusive economy in Indonesia. To avoid the problems of endogeneity and omitted variable bias, the method used in this study is the system generalized method of moments (GMM). It was found that local government spending on housing and social functions positively and significantly affected the Inclusive Economic Development Index (IEDI). In contrast, government spending on health had a significant negative effect. Spending on education had an insignificant negative effect, while investment had a positive and significant effect on IEDI. The corruption rate as a proxy for the quality of institutional processes had a significant adverse impact on IEDI. This study provides an overview of the role and influence of local government policies and institutional quality that affect the region’s development and inclusive economic growth.

Role of institution quality in the impact of government expenditure on economic development: a case study in Vietnamese provinces

ABSTRACT To examine the impact of fiscal policy through public spending at provincial level in Vietnam, this study uses the combination among different regression methods for panel data of 63 Vietnamese provinces during the period 2010–2020. The Feasible General Least Squares (FGLS) estimator and S-GMM estimator shows that there exists a positive effect of government expenditure on provincial economic growth. Moreover, the contribution of investment expense to supporting economic activity is expected more effective than that of current expenditure in the context of Vietnamese provinces. With techniques for analysing the marginal effects of interactive variables in research model, the role of local institutional quality is confirmed to improve the positive impact of government expenditure on provincial economic growth. In general, some policy implications are suggested based on the results to help local government stimulate the economic development in Vietnam.

The ‘play’ of institutions and firm investment: Evidence from a transition economy

AbstractAccording to recent literature in new institutional economics and entrepreneurship, institutions, including formal and informal ones (i.e., the rules) are important. However, in a homogeneous national institutional environment, it is unclear whether and how the execution of institutions (how the rules are implemented) matters. The purpose of this research is to assess the mechanisms that local governments can use to encourage entrepreneurial investment, which determines the future growth potential of small businesses. We find that (i) improving local institutional quality in general boosts entrepreneurial investment; and (ii) more financially constrained firms are more sensitive to informal local governance, while less financially constrained firms are more sensitive to local formal institutions, using a large‐scale small and medium‐sized enterprise (SME) dataset from Vietnam from 2006 to 2019.

The role of local institutions in cooperative banks’ efficiency. The case of Italy

A large body of literature investigates various sources of bank efficiency. Nonetheless, little empirical evidence is available on the role played by institutional quality. Further, the extant research neglects the relevance of local institutions, which should be particularly important for local banks. To fill this lacuna, this paper investigates the relationship between local institutional quality and the cost-efficiency of Italian cooperative banks. Applying Stochastic Frontier Analysis to data spanning the years from 2006 to 2015, we find that better institutions – and especially control of corruption – are associated with improvements in bank cost efficiency. This evidence suggests important implications for the definition of suitable strategies aimed at controlling corruption and improving law enforcement at the local level, to decrease bank operating costs and mitigate moral hazard problems jeopardising managers’ incentives.

Institutions matter: The impact of the covid-19 pandemic on the political trust of young Europeans.

In this paper, we study the short‐run evolution of political trust during the recent covid‐19 pandemic using survey data for a sample of young individuals living in Germany, France, Italy, and Spain. In particular, we analyze whether pre‐pandemic perceptions and experiences of citizens about various dimensions of local governments and institutional quality had any mediating effect on the evolution of political trust after the outbreak of the covid‐19 pandemic. The results show a relative increase in political trust of about 9% in regions with high institutional quality (75th percentile) compared with regions with low institutional quality (25th percentile) over the period 2019−2020. This divergence can be associated with either a better performance of policymakers in high‐quality institutions regions, or to more positive attitudes toward politicians by citizens that, before the pandemic, believed to live in regions with efficient institutions. Overall results are not affected by the inclusion of regional fixed effects or by possible differential evolution of political trust according to a large set of observable regional characteristics.

Social capital, quality of institutions and lockdown. Evidence from Italian provinces

This paper uses the exogenous shock generated by the COVID-19 pandemic and the relative government response as an informative case in investigating the factors able to affect policy efficacy. Lockdown measures have been widely adopted to limit the diffusion of COVID-19, indirectly supporting the capacity of the hospital system to face the pandemic. Lockdown obliges people to change their social behaviour significantly, and consequently is a matter of serious concern amongst the population. For this reason, how people react to lockdown is of the utmost importance, since failure to observe it properly will be of little benefit in reducing contagion. In this rationale, factors correlated with individuals’ behaviour could affect the efficacy of such measures. The aim of this paper is to investigate whether differences in institutional quality and social capital are correlated with the efficacy of lockdown measures, taking the Italian provinces as a case study. Using a quantitative analysis employing F-GLS estimators, our results suggest that both local social capital and institutional quality have affected the efficiency of lockdown measures in Italian provinces. In general terms these factors contribute to forming the set of incentives able to promote individual behaviour that is in closer compliance with government choices. In this perspective, institutional quality and social capital can be considered factors able to influence the efficacy of policies.

Does institutional quality matter for export product quality? Evidence from China

In this study, we discuss institutional quality and export product quality within a unified framework and explore the influence of institutional quality on product export quality empirically by matching regional-level data, Chinese Industrial Enterprises Database and the China Customs Import and Export Database in the period of 2000–2011. To reflect institutional quality as comprehensively as possible, we construct an index system including six institutional factors: financial service, open-door, government intervention, corruption, property rights protection and judicial fairness. To avoid the loss of information and minimize the endogeneity of reverse causality, we take advantage of microdata of enterprise in regression. The results show that, on average, the improvement of institutional quality has a positive impact on export product quality; Compared with processing trade, export product quality of general trading enterprises is more affected by local institutional quality. Among the various factors of institutional quality, corruption and judicial fairness have the greatest impact on export product quality.

Credit constraints in European SMEs: does regional institutional quality matter?

ABSTRACT We analyse the investment-to-cash flow relationship in Europe using a sample of manufacturing small- and medium-sized enterprises (SME) over the period 2009–2016. We investigate the effect of regional institutional quality on the investment-to-cash flow sensitivity, finding that, although credit constraints remain a serious problem for European SMEs, high-quality regional institutions contribute to mitigate the dependency on internally-generated resources to finance new investments. Improvements in local institutional quality can therefore facilitate SMEs’ access to credit – e.g. through inter-firm trade credit relationships –, but are insufficient to overcome the credit restrictions faced by European SMEs.

Open innovation knowledge management in transition to market economy: integrating dynamic capability and institutional theory

ABSTRACT This study provides a theoretical framework and empirical evidence to argue that a knowledge management process under the open innovation paradigm brings a viable solution for firms, especially those in transition economies, to acquire valuable knowledge-based dynamic capabilities to respond to environmental changes and achieve desirable organizational performance. These knowledge-based capabilities in turn enable firms to enhance their economic performance in terms of productivity and profitability. Dynamic capabilities act as an intermediary that bridges firms’ open innovation efforts and their economic realization. Local institutional quality plays an important moderating role in this process. Micro-sized firms have not consistently obtained the expected economic benefits from their open innovation efforts, which require more policy attention. For empirical evidence, we consider a comprehensive range of measures for open innovation and dynamic capabilities. Our proposed hypotheses are tested in a set of seemingly unrelated equations by combining two datasets from the Vietnam SME survey and the Provincial Competitiveness Index survey. As a robustness check, we estimate the performance equation applying fixed-effect regression and one-year lag structure.

Local institutional quality and economic growth: A panel-VAR analysis of Italian NUTS-3 regions

We explore the relationship between institutional quality and economic growth across a panel of Italian NUTS-3 regions. Estimates from panel vector autoregressions provide robust evidence in support of a causal effect of institutional quality on growth. This is found to be particularly important in areas characterised by lower levels of economic development. Conversely, no evidence is found of reverse dynamics of economic growth on institutional quality. The results cast doubts on the view that policies focusing on economic growth per se may lead to a strong institutional context, suggesting intervention aimed at improving formal institutions to be a pre-requisite for sustained regional development.

The Politics of Explanatory Nationalism and the Evolution of the United Nations Agenda on Multinational Enterprises

Social problems in the global South are often explained by reference to domestic decisions or “institutional quality” in the Southern countries, while there are also prominent criticisms of such “nationalist explanations”. Crucially, the dispute over correct mode of explanation is not only epistemological, but also political, as has been often noted in analyses of hegemony. This paper develops such ideas about “hegemonic” forms of explanation by analysing how an explanatory tendency becomes institutionalised in the operating logic of international organisations. We analyse as a case study the long-term developments within the UN in the field of multinational enterprises (MNEs). We follow the process in which an agenda focused on the regulation of MNEs shifted into the direction of focusing on local institutional quality and emphasising “partnerships” instead of regulation. The analysis demonstrates how political momentum and external challenges affect explanatory tendencies, and generally the deep impact of organisational embeddedness of these tendencies.

What Determines Firm Investments? The Role of Local Institutional Quality

The influence of the environment on firms’ investments has been largely investigated. Literature underlines that the national institutional quality is one of the key driver of firms’ investment strategies. It is instead, relatively unexplored, if local institutional quality may affect firms’ investments, that is if difference in institutional quality within the same country may influence firm investments. To this purpose, we collected data about a large sample of limited companies in Italy, a country characterized by significant variation of institutional quality within it. Our results show that higher local institutional quality positively influences firms’ total investments. Moreover, our results highlight that regulated industry and state-ownership moderate this relationship. In particular, we find that, when local institutional quality decreases, regulated and state-owned firms invest more than non-regulated and non-state-owned firms; the opposite is true when local institutional quality increases. These findings underline the importance of local institutional quality and the heterogeneous reaction of regulated and state-owned firms to changes in the institutional environment.

Institutional quality, conforming and evasive entrepreneurship

In this article, we unpack Baumol’s (J Polit Econ 98(5):893–921, 1990) theory of entrepreneurship’s outcomes (productive, unproductive, and destructive) in a framework of failing institutions, considering that entrepreneurship is instead first characterized by two non-mutually exclusive types of behavior (conforming versus evasive). We hypothesize that the evasive activity (firm-level corruption) is undertaken as a second-best response to poor institutional quality, supporting the conforming activity. Using instrumental variable panel regression in the context of Indonesia, we evidence the mediating effect of bribing on the relation between local institutional quality and new business density, thus unveiling the real effect of institutional quality on entrepreneurship.

The Impact of Governance Quality on Subsidiaries’ Performance: A Survey Analysis from Turkey

We employ the quality of governance to study the impact of local institutional context on foreign subsidiaries’ performance. We propose and empirically document that local institutional quality has growth-enhancing effects on subsidiary growth. More specifically, we show that political stability, government effectiveness, regulatory quality, and rule of low are positively and significantly related to subsidiaries’ output. Our findings suggest that, apart from resources and market considerations, institutional constructs should be included as influential predictors in the general models investigating subsidiary performance.

Rule of law and regulatory quality as drivers of entrepreneurship

ABSTRACT This paper investigates empirically the effects of institutions on new business formation in the Italian provinces over the period 2004–12. According to the results, local institutional quality positively affects entry rates, and its impact is stronger in high-tech industries. Among different institutional dimensions, rule of law turns out to be more important in southern lagging regions, while regulatory quality seems more relevant in the developed centre–north. In times of crisis, institutional quality loses importance in determining entries, which become more sensitive to the propensity to innovate and to human capital and infrastructural endowments.