Low Institutional Quality Research Articles

Credit rationing, institutions and local public debt

This work presents a model of credit rationing under the effects of judiciary in- efficiency and criminal extraction. Under low judiciary quality and high criminality, we argue that banks are more likely to lend to the government rather than private enterprises. We argue that credit rationing increased local public debt in Mexico before coming into effect the new law of Financial Discipline for States and Municipalities in 2016. Our scientific objective is explaining the supply of bank loans to the local public sector in Mexico under low institutional quality and credit rationing. We use Panel regression analysis and also applied an Autoregresive Distributed Lag model to obtain the long term growth rates. We also used Clustering analysis in order to classify states in Mexico in terms of their debt, defaults in the industry sector, crime and judicial inefficiency rates. Our empirical analysis shows that judiciary inefficiency and criminality induced higher amounts of bank loans to state governments during the period of 2004 to 2016. We also found that defaults in the industry sector also increased the amount of bank loans to local governments in Mexico, which may explain in part that the rationed credit is redirected to the public sector. We argue that keeping the quality of institutions low may induce higher bank lending to states, so there might be little incentive to improve the judiciary and public safety. The possible solution is to improve judicial efficiency and decrease criminality in order to reduce credit rationing and subsequently ensure local public debt stability in the long term.

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.

Energy efficiency, market competition, and quality certification: Lessons from Central Asia

Energy efficiency at the firm level is determined by a series of complex and multifaceted factors related to firm-specific attributes and a firm's external environment. A weak institutional environment may exacerbate barriers to energy efficiency, sending interested firms in search of ways in which to signal their commitment to improving their energy usage. Paramount among these mechanisms is internationally recognized quality certification, which can both reward a firm for prior improvements and alert consumers about the quality of a firm's products. This paper examines the effect of quality certification on energy efficiency in a particularly low institutional quality environment, the four transition countries of Central Asia. Using firm-level data and controlling for other determinants of energy intensity, we find that firms that have quality certifications are indeed more efficient in their use of energy. Perhaps more importantly, we find that competition from the informal sector is also incredibly important to improved energy efficiency. The effect of certification also runs back to firm planning, as certified firms are more likely to focus on energy efficiency metrics rather than overall usage in planning for the future.

FDI Flows in resource-rich countries: does the quality of institutions matter?

Relevance. Foreign investment is likely to be attracted to resource-rich countries because of their wealth of natural resources. However, the fact that foreign direct investment (FDI) contributes less than 10% of these countries’ GDP indicates that FDI has a non-proportional impact when compared to the size of the natural resources. Hence, it is critical to identify the missing link impeding resource optimization through FDI. Research objective. Given the significance of FDI, the study seeks to ascertain whether the quality of institutions in resource-rich countries influences FDI inflows. This is significant because resource-rich countries may have other factors that encourage FDI but do not result in resource optimization. Data and methods. The study employed panel data analysis to analyze the impact of FDI on economic growth in resource-rich countries and the role of institutions in attracting FDI. The study relies on the Augmented Mean Group Estimator and on the annual data from the World Bank's World Development Indicator and the World Bank's World Governance Indicator for the top ten resource-rich countries. Results. Our preliminary evidence indicated that FDI had a positive and significant effect on economic growth in resource-rich countries. The extent of the influence, on the other hand, is minimal for all categories of countries. Our main results revealed that institutional quality has a significant pull effect on FDI, with trade openness playing a key role, particularly in resource-rich nations with well-developed institutions. Conclusions. We found that institutional quality plays a critical role in attracting FDI, which could have hampered natural resource optimization. Furthermore, countries with high institutional quality and less restrictive investment policies attract more foreign direct investment (FDI) than countries with low institutional quality and with investment policies ranging from moderate to restrictive. In general, resource-rich countries, particularly those with weak institutional qualities, should address the gap in institutional quality to attract more inward investment.

The Institutions and Mechanisms of The Russian Innovation System's Regulation in The Mirror of Narratives

The innovation system is a set of institutions and regulatory mechanisms that create an environment for the interaction of organisations and actors in the academic sphere, business and the state. An analysis of the formal institutions of the Russian innovation system (RIS) showed that it has a complex structure consisting of numerous overlapping institutions and duplicating regulatory mechanisms. The state and the academic sphere are closely integrated into a single management hierarchy, and interaction with the business is carried out indirectly through development institutions and the mechanism of public procurement. In cooperation with the academy, large private and state-owned companies often solve the problem of training their own human resources rather than creating innovations. Comparison of the multi-level structure of the RIS and its reflection in the actors' narratives made it possible to show the complexity of the systemic perception of innovation activity in Russia and highlight the following dysfunctions of the RIS: The low quality of formal institutions and the lack of consistency in regulation; Selectivity and inconsistency of the ongoing state innovation policy; Underdevelopment of mechanisms for the formation of links between science and business; Lack of infrastructure, production and production capacities for scaling innovative products; Underfunding of education, science and innovative developments by the state and private business; Breach of the mechanisms for the reproduction of human resources for innovation.

Social capital as a containment factor of the COVID-19 pandemic

Effectiveness of the pandemic containment can depend upon both actions of governments and willingness of the population to follow the introduced rules, which is heavily dependable upon the social capital structure in society. This article analyzes relationship between various components of social capital and changes in mobility during the COVID-19 pandemic. The article is based on data from the World Values Survey, Google COVID-19 Community Mobility Reports, Oxford COVID-19 Government Response Tracker, etc. The study hypotheses have been empirically tested on a sample of 61 countries, as well as subsamples of countries with high- and low-quality institutions. The results show that high levels of trust in the government, police and courts, as well as developed norms of cooperation in society (in particular, dislike of free riding), other things being equal, contribute to lower mobility during the pandemic. This effect is particularly pronounced in countries with high-quality institutions. A high level of generalized trust, on the contrary, is not associated with a lower mobility during the pandemic, which may limit its containment, especially in countries with low-quality institutions. The results obtained can be used for developing socio-economic policy aimed at containing the pandemic.

Pakistan’s Bilateral Trade under MFN and SAFTA: Do Institutional and Non-Institutional Arrangements Matter?

The purpose of this study is two fold. First, to estimate the impact of institutional and non-institutional arrangements on bilateral trade, and second to analyse the impact of SAFTA on bilateral trade in the short as well as in the long run. The empirical analysis which is based on the panel of eight South Asian countries, comprising data over the period i.e. 1975–2013 is conducted using fixed effects model along with Pooled Mean-Group (PMG) estimator for estimating the short and long-run relationships. The analysis has shown that trade agreements including South Asian Free Trade Area (SAFTA) and the Most Favoured Nation (MFN) are not effective in promoting trade, due to low institutional quality and stringent non-institutional arrangements, including high tariff along with low physical infrastructure. Further empirical analysis has shown that both SAFTA and MFN can only contribute to bilateral trade significantly, if complemented by institutional framework. As a policy lesson, to improve the trade ties between India and Pakistan, improvement in physical as well as soft infrastructure is required. Any trade agreements between the two, including MFN can only be effective, when it is supported by a well-defined and enforced institutional framework that ensure the implementation of policy reforms needed to reduce tariff rate and remove non-tariff barriers.

Does institutional quality affect the impact of public agricultural spending on food security in Sub-Saharan Africa and Asia?

Due to declining or stagnating agricultural productivity and rising food insecurity, African countries agreed to dedicate ten percent of public spending to agriculture under the Maputo and Malabo declarations in 2003 and 2014, respectively. Similarly, Asian countries increased spending on agriculture via input subsidies for crop production, greater mechanisation, and research and development funds. These spending increases are happening in countries with varying levels of institutional quality, and hence, differences in observed outcomes. Using cereal prodution as proxy for the availability dimension of food security, we conduct a comprehensive empirical assessment of the impact of public agricultural spending on food security under heterogeneous institutional quality regimes. We estimate fixed effects models with robust standard errors using an unbalanced panel of 25 countries in Sub-Saharan Africa and Asia over 22 years. The preponderance of evidence suggests that institutional quality plays a significant mediating role on the impact of public agricultural spending on food security. Overall, the magnitude of change in cereal production due to public agricultural spending is larger for countries with higher institutional quality than for those with lower institutional quality. While public investment in agriculture enhances food security, its effectiveness is predicated on improvements in the quality of public institutions. High quality public institutions protect private physical and intellectual property and guide prudent use of public resources.

The “Double Trap” in China—Multiple Equilibria in Institutions and Income and their Causal Relationship

While institutions are said to be poor in China in cross-country comparison, recent research indicates that at the provincial level, institutional quality plays in fact an important role for the economic success of a province, municipality, or autonomous region in China. Our paper aims to add further arguments to this discussion by focusing on the concept of club convergence. In particular, we analyze whether institutional quality in low-income provincial level administrative divisions converges to the level experienced by relatively highly developed ones or whether there exist multiple institutional clubs over the period 1997–2007 by using the log t test proposed by Phillips and Sul (Econometrica 75(6):1771–1855, 2007). Our findings indicate that there exist multiple institutional clubs within China, three rather small clubs which follow an above-average high institutional quality path and two clubs which find themselves on a relatively low institutional quality path and which together account for the majority of provinces and autonomous regions. Using the same methodology, we find that various members of the poor institutional clubs are additionally caught in a low-income trap. In a next step, we analyze the causal relationship between poor institutional traps and low-income traps in China by using a recursive bivariate probit model. We find evidence that institutional traps are important determinants of income traps, giving rise to the recently identified phenomenon of a ‘double trap’. Finally, our findings indicate that human capital and urbanization are additional important determinants of income traps, while globalization is decisive for avoiding poor institutional traps.

INFLUENCE OF INTERACTION BETWEEN INSTITUTIONAL QUALITY AND TAXPAYERS’ BEHAVIOURS ON TAX FRAUD MANAGEMENT IN SOUTH WEST NIGERIA

Tax fraud remains the greatest challenge to the government across the world, but the alarming rate at which it is being perpetrated in Nigeria is of concern to the government. The government has lost billions of naira as a result of this. The involvement of taxpayers in tax fraud depends on the level at which they perceive the institution of governance. Hence, this study examined the influence of interaction between institutional quality and taxpayers’ behaviors on tax fraud management in south-west Nigeria. The study employed a quantitative method to generate data from the total population of 504,263 respondents. The sample size consisted of 400 taxpayers (companies and businesses) registered with the Federal Inland Revenue Service in southwest Nigeria. The data were analyzed using the partial least squares structural equation model (PLS-SEM). The interaction of institutional quality and taxpayer behaviors on tax fraud management was found to have a significant negative relationship (= -0.066, t = -1.763, p = 0.039, 0.05). According to this study, the sets of exogenous latent variables (i.e., institutional quality and taxpayer behaviors) explain 78% of the variance in tax fraud management. The study concluded that the working together of taxpayers’ perceptions of both low institutional quality and taxpayers’ behaviors has a significant influence on the tendency for taxpayers to engage in tax fraud management in south-west Nigeria. It was recommended that the better the morale of a taxpayer, the lower the tax fraud. Therefore, the government is advised to adopt policies and measures that can boost the taxpayers’ morality, which will in turn enable them to see tax fraud as a negative to their principled value system as law-abiding citizens. It is also recommended that tax authorities should be seen as taxpayers' friends by making their interactions with taxpayers less bureaucratic.<p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/edu_01/0261/a.php" alt="Hit counter" /></p>

Economic policy uncertainty and renewable energy innovation: International evidence

This research investigates the impact of economic policy uncertainty on renewable energy innovation, based on a panel of 22 countries during the period 1985–2019. The results indicate that economic policy uncertainty exerts a positive effect on renewable energy innovation that lasts for at least 3 years. Subsample analysis shows that OECD members and right-wing countries experience higher growth in renewable energy innovation compared to non-OECD members and left-wing countries. In addition, economic policy uncertainty improves renewable energy innovation only for high institutional quality countries, while the effect becomes insignificant for low institutional quality countries. After separating different renewable energy types, this paper presents that wind energy witnesses a largest incline in renewable energy innovation compared to other renewable energy types. This research provides international evidence for the relationship between economic policy uncertainty and renewable energy innovation.

Building Bridges: Bilateral Manager Connections and International Trade

We investigate whether top managers with personal ties to a foreign country facilitate trade with that country by overcoming bilateral trade barriers that obstruct international business relationships. Using individual managers' nationality, we construct a novel database of bilateral top manager connections. We analyze the trade effects of these bilateral manager connections both on the firm and on the country level. On the country level, we provide evidence for a positive effect on both bilateral exports and imports. On the firm level, we find positive effects on destination-specific foreign sales. We show that this firm-level effect is especially pronounced for institutionally distant destinations, which we interpret as bridging the gap between institutionally dissimilar countries. Furthermore, the effect is stronger for destinations with less developed institutions indicating that manager connections help overcoming trade barriers created by low institutional quality. Moreover, we show that the strength of this effect also depends on characteristics of the individual manager. Namely, the effect differs between connections of male and female managers.Gender discriminating institutions in the destination country severely downsize the pro-trade effect of female managers' connections, which could give rise to an unintended importing of gender inequality regarding management positions.

How to improve the survivability of environmentally innovative firms: The case of Vietnam's SMEs

Environmental innovation (EI) is a complicated task with high investment costs and long-lasting administration demands. These challenges discourage firms from implementing EI, while firms that do perform this activity are exposed to a risk of failure and may be forced to leave the market. This paper seeks to show how to improve the survivability of environmentally innovative firms. We used survey data on small and medium-sized enterprises (SMEs) in Vietnam from 2007 to 2015 to examine the effects of EI implementation on firm survival, taking into account different internal capacities, operating in a corrupt environment, and unfair competition. In this paper, the provincial competitiveness index is employed to measure corruption in the economy, based on different dimensions, namely transparency, informal costs, time costs, fair competition, proactive and creative provincial leadership, and fair and effective legal procedures. Firm size and exporting status are employed to capture firms' internal capacities. By employing the semi-parametric Cox proportional hazard model and two parametric specifications, including Weibull and exponential, the results show that only conventional innovation promotes firm longer-term survival, while there is a negative association between EI and the probability of firm survival. We conduct a robustness check using the propensity matching method. We show that the relationship is most evident for firms operating in an economy that features low-quality institutions or unfair competition. Firms’ internal capacities are essential in permitting firms to earn greater benefits from EI implementation. The findings of our study are an essential foundation for economists and policymakers in the design and implementation of processes to assist firms in dealing with environmental issues and ensuring that firms benefit when undertaking EI activities.

How do emerging debt market participants recognize firm internationalization?Evidence from effects on credit ratings

We explore the firm internationalization's impact on firm credit ratings in emerging economies. Adopting Chinese data from 2009 to 2018, we document that firm internationalization varies negatively with its credit ratings, indicating that emerging debt market participants are risk averse and prioritize the risks involved in firm internationalization endeavors. This association is amplified for firms operating in host countries with lower institutional quality, decreased cultural distance from home countries, and when firms do not hold tax haven subsidiaries. We observe that the main association is consistent when alternative dataset (India, Russia, and Brazil) or proxy (cost of debt) is applied.

Cross‐border mergers and acquisitions and corporate social responsibility: Evidence from Chinese listed firms

AbstractThis study examines the impact of cross‐border mergers and acquisitions (M&As) on acquirers’ corporate social responsibility (CSR). Based on a sample of Chinese listed firms, we find that firms with cross‐border M&A activities experience an improvement in subsequent CSR performance. Specifically, the CSR rating is approximately 8.24% higher in firms with cross‐border M&As than in those without such activities. We also find that this positive influence is more pronounced in firms with low initial CSR ratings than in those with high initial CSR ratings at the time when a cross‐border M&A deal is completed. Additional analyses reveal that this positive effect is mainly driven by the target firms from countries with high social preference relative to China and that the enhancement in CSR driven by cross‐border M&As translates into higher operating performance and easier access to finance. Overall, our findings demonstrate that cross‐border M&As can serve as a critical channel for acquirers from a country with low institutional quality to build a better reputation through environmentally friendly behaviour and socially responsible engagement, and therefore gain capital market benefits.

Does Institutional Similarity Necessarily Lead to Increased Bilateral Trade?

To shed light on the question of whether or not institutional similarity always increases bilateral trade, we divide institutional quality into the low level (one standard deviation below the mean), medium level (in between minus one and one standard deviation from the mean), and high level (one standard deviation above the mean). By applying the system-GMM estimator, we found that the institutional similarity between the two countries has a trade-boosting effect, except in cases where one or both countries have low-institutional quality. These imply that measures to enhance institutional similarity must be accompanied by policies to promote institutional adaptability.

Where did it hit harder? Understanding the geography of excess mortality during the COVID-19 pandemic.

The health impact of the COVID‐19 pandemic across OECD (Organisation for Economic Co‐operation and Development) and European regions has been strikingly uneven. In 2020, excess mortality rates in the hardest‐hit regions were, on average, 17 percentage points higher than those in the least affected regions of the same country. This paper shows that low health system capacity, followed by population density, air pollution, the share of elderly people, and low institutional quality were associated with higher excess mortality during the first year of the pandemic. Finally, reduced home‐to‐work mobility, following governments' COVID‐19 responses, was associated with lower excess mortality 2 months after implementation of the measures.

Climate change, institutional quality and SDGs: A narrative review with a focus on Yemen

The purpose of this paper is to undertake a narrative review on climate change, institutional quality, and SDGs within the context of Yemen. The methodology is a broad study of past and recent academic works related to the topic's keywords. In essence, a narrative review has been undertaken to incorporate the three interlacing issues; climate change, institutional quality, and SDG in the context of Yemen. The present research work reinforces the evidence that climate change effects are particularly more catastrophic in regions already under political, socio-economic, and cultural pressures. Eventually, the attainment of SDGs become increasingly challenging in contexts with intense climate variability and native disturbances. Besides, the lack of quality institutions and strong governance put in peril the stability of the country, thereby making it more prone to conflicts. This eventually leads to the formation of a vicious circle where low institutional quality fecund more conflicts, which in turn further destabilizes state institutions. Overall, climate change is making matters worse for countries like Yemen, and hence this study provides an insight into the Yemenite society and economy. Since this is a narrative review with an interpretive approach, further studies should aim to engage in more econometric analysis covering the interference relationships between climate change, institutional quality, and SDGs, especially in countries facing the turmoils of war and conflict.

Testing conditional multivariate rank correlations: the effect of institutional quality on factors influencing competitiveness

Joint distribution between two or more variables could be influenced by the outcome of a conditioning variable. In this paper, we propose a flexible Wald-type statistic to test for such influence. The test is based on a conditioned multivariate Kendall’s tau nonparametric estimator. The asymptotic properties of the test statistic are established under different null hypotheses to be tested for, such as conditional independence or testing for constant conditional dependence. Two simulation studies are presented: The first shows that the estimator proposed and the bandwidth selection procedure perform well. The second presents different bivariate and multivariate models to check the size and power of the test and runs comparisons with previous proposals when appropriate. The results support the contention that the test is accurate even in complex situations and that its computational cost is low. As an empirical application, we study the dependence between some pillars of European Regional Competitiveness when conditioned on the quality of regional institutions. We find interesting results, such as weaker links between innovation and higher education in regions with lower institutional quality.

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.