Low Institutional Quality Research Articles

Impact of Financial Innovation and Institutional Quality on Financial Development in Emerging Markets

Financial innovation and institutional quality play a key role in financial development. This study investigates the impact of financial innovation and institutional quality on financial development in an emerging markets setting. We used the sample of 17 emerging markets based on the availability of data from the period 1990–2020. Data were extracted from the World Development Indicator database. In this study, panel unit root, fully modified ordinary least squares and Pedroni Integration tests were applied to analyze the data. We find that financial innovation and institutional quality are significantly and positively related to financial development. Better financial innovation increases financial development, whereas low institutional quality in an emerging market can deteriorate financial development.

Pollution Haven Hypothesis in Africa: Does the Quality of Institutions Matter?

This article aims at investigating whether the FDI inflows affect CO2 emissions for a set of 40 African countries. To be specific, it seeks to perceive, to what extent the quality of institutions plays a role in the empirical validity of the famous pollution haven hypothesis (PHH). We apply Panel ARDL and the three estimators; Pooled Mean Group (PMG), Mean Group (MG) and Dynamic Fixed Effect estimator (DFE) but also Granger causality and Dumitrescu and Hurlin causality for annual data from 1988 to 2016. Long run results indicate the link between FDI, and pollution is relatively complex. If in general, the PHH does not seem to be validated, the result represents quite the opposite when we consider the institutional quality in the diverse African countries. Indeed, our results show the quality of institutions determines the nature of FDI received by African countries. In countries with a high level of corruption, inward FDI significantly reduces CO2 emissions, while in countries with low institutional quality, inward FDI increases CO2 emissions. Some policy recommendations have been formulated to support African countries reduce carbon emissions and support economic development. In particular, institutional reform would enable African countries to reconcile economic development, particularly through the FDI, with environmental quality.

The effects of elections on macroprudential policy

We provide evidence for a specific challenge in the design of macroprudential policy, namely political interference. Using panel data from 80 countries over the period of 1990–2016, we uncover the electoral cycles in macroprudential policy. We show that a loosening in macroprudential policy becomes more likely in the pre-election year, especially in countries with lower institutional quality. There is no evidence for the reversal of such actions in the post-election year. We also find that capital account openness, the history of macroprudential policy actions and inflation matter in determining the strength of electoral cycles in macroprudential policy, in addition to institutional quality. The electoral cycles are found to be stronger in countries that are financially less open, that relied less on macroprudential policy in the past, and that have lower inflation.

Towards a green world: the impact of the Belt and Road Initiative on the carbon intensity reduction of countries along the route.

The Belt and Road Initiative (BRI) has attracted widespread attention since its implementation, especially the ecological effect. However, the net environmental impact of the BRI on countries along the route has rarely been directly assessed, though nearly 8years after the BRI was proposed. This study quantitatively estimates the net effect, impact mechanism, and impact heterogeneity of the BRI on the carbon intensity reduction of countries along the route by adopting the difference-in-differences estimator based on propensity score matching, which enables a more convincing causal relationship between the BRI and the countries' ecological improvement. Research indicates that the BRI has significantly promoted the carbon intensity reduction of countries along the route, which is mainly achieved by boosting the growth of green economy (scale effect), the progress of green technology (technique effect), and the upgrading of industrial structure (composition effect). Moreover, the impact reveals obvious heterogeneity, manifested as the BRI has significantly promoted the carbon intensity reduction of countries with high institutional quality, high-income countries, and countries along the Silk Road Economic Belt, while its impacts on countries with low institutional quality, low-income countries, and countries along the 21st Century Maritime Silk Road are not significant. A series of validity tests further demonstrate the robustness of the estimation.

National Innovation System: Construction in Progress

The article examines the evolution of the innovation system in Russia over the past years, based on international data. A comparative analysis of the strengths is carried out and development problems are shown, among which the main attention is paid to the low degree of connectedness of the main actors: science, education, the business sector and the state. In recent years, numerous state initiatives have been undertaken with the purpose to place Russia among the countries - world leaders in the field of science, technology and innovation. The strengths of Russia have been and remain the quality of human capital (secondary and tertiary education) and the knowledge creation (number of researchers, number of patents).Opportunities for transforming generated knowledge into innovative goods and services are limited by the low quality of regulatory and political institutions and weak interaction of individual elements of the innovation system

Direct Foreign Investments in the Ukrainian Economy: State and Problems of Attracting

Investment is one of the main sources of sustainable economic growth of any country. A special need for investment, including foreign ones, is experienced by countries with economies in transition, to which Ukraine belongs. This article aims to analyze the state and dynamics of foreign direct investment and determine the sectoral structure of foreign direct investment in the national economy in the sectoral dimension to identify the problems and opportunities for investment development of Ukraine. According to the results of the analysis, it was found that the volume of foreign direct investment in Ukraine remains at a low level, and cannot affect the solution of problems related to the raw materials orientation and sectoral inefficiency of the national economy. Trends in attracting foreign direct investment to Ukraine are analyzed and the main factors slowing down this process are identified. These factors include the ongoing military conflict in the East of Ukraine, macroeconomic problems, political instability and low quality of institutions. It was found that, starting in 2018, there has been a gradual renewal of the interest of foreign investors in Ukraine. At the same time, it was found that foreign investments are directed mainly to less technologically and science-intensive industries and sectors of the economy. They account for about 60% of the total volume of foreign direct investment in the Ukrainian economy. It was emphasized that the priorities for national and foreign investment in Ukraine should be medium- and high-tech industries, which currently account for only a few percent in the total structure of foreign direct investment. To remedy the current situation, it is proposed to introduce tax and non-tax methods of investment incentives, among which industrial parks should take a special place as one of the most effective tools for attracting foreign investment in world practice. They contribute not only to the inflow of foreign investment, but provide many other advantages to countries and regions, including: the creation of new jobs, an increase in industrial production, the growth and diversification of exports, the attraction of foreign technologies and management practices, the development of high-tech industries. All these advantages and benefits from the creation of industrial parks are in need of Ukraine.

The effect of foreign institutional ownership on corporate tax avoidance: International evidence

We find that foreign institutional investors (FIIs) reduce their investee firms’ tax avoidance. We provide evidence that the effect is driven by the institutional distance between FIIs’ home countries/regions and host countries/regions. Specifically, we find that the effect is driven by the influence of FIIs from countries/regions with high-quality institutions (i.e., common law, high government effectiveness, and high regulatory quality) on investee firms located in countries/regions with low-quality institutions. Furthermore, we show that the effect is concentrated on FIIs with little experience in the investee countries/regions or FIIs with stronger monitoring incentives. Finally, we find that FIIs are more likely to vote against management if the firm has a higher level of tax avoidance.

Government-sponsored Venture Capital and Corporate Financial Constraints: Wish-fulfilled or Backfired?

Has the establishment goal of China’s government-sponsored venture capital to alleviate corporate financing difficulties achieved? This paper conducts a systematic study on this based on the micro data of listed companies and manually collected government-sponsored venture capital data. The empirical results steadily show that government-sponsored venture capital can effectively alleviate the degree of subsequent corporate financial constraints, thus the Chinese government’s involvement in venture capital activities has been effective and largely achieved the original purpose for which it was established. Furthermore, government-sponsored venture capital with a higher shareholding ratio, multi-joint investments, and higher political levels has a stronger effect on alleviating the financial constraints of funded enterprises. Heterogeneity analysis shows that government-sponsored venture capital has a stronger effect on enterprises in the environment of underdeveloped economy and low institutional quality, enterprises facing high environmental uncertainty and high competition, private enterprises, and enterprises in the period of growth and turbulence, the feature of which is like “timely help”. The mechanism test shows that government-sponsored venture capital can not only significantly reduce the degree of corporate information asymmetry through the role of certification, but also exert the resource effect of political connections, including significantly promoting bank-enterprise relations and the ability of enterprises to obtain trade credit, and increasing the government subsidies that enterprises receive, thereby reducing the financial burden of enterprises and alleviating their financial constraints. The analysis of economic consequences shows that government-sponsored venture capital can significantly reduce the cost of equity capital and debt capital for the external financing of enterprises, helping to improve the problem of expensive financing for enterprises, and contributes to the sound development of enterprises in innovation and operation. However, government-sponsored venture capital has not played an effective role in supervision, and cannot alleviate the principal-agent conflicts of enterprises, especially it will lead to a significant increase in the first type of agency costs, and the increase in executive compensation plays an important role. Therefore, in the future development of government-sponsored venture capital, it is necessary to grasp the degree of “government role” intervention, and improve the supervision and management mechanism of government-sponsored venture capital over enterprises. At the same time, taking into account the uneven development of regions, it is important to provide appropriate and necessary assistance to the development of government-sponsored venture capital in the central and western regions, so as to promote the rapid development of government-sponsored venture capital in the new era.

Natural resources, institutions and the quality-adjusted human capital

PurposeThe purpose of this paper is to investigate the resource rents–quality-adjusted human capital nexus and the impact of quality of institutions.Design/methodology/approachFor a large data set of 161 countries for the period 1996–2018 (yearly and 4-year periods), fixed effect estimation method is applied to investigate the impact of resource rents on quality-adjusted human capital and the role of quality of institutions on this relationship.FindingsThe paper found little evidence on the negative, significant and direct impact of total resource rents on quality-adjusted human capital. However, the results show that the negative effect of resource rents can be mediated by the quality of institutions. This result is robust to a long list of controls, different specifications and estimation techniques, as well as several robustness checks. Therefore, institutional quality seems to play a critical role in determining the indirect impact of natural resources on human capital. Moreover, the obtained results demonstrate that this resource adverse effect depends on the type of resource rents; in particular, high dependency on oil rents in developing countries appears to harm human capital.Research limitations/implicationsThe paper shows that it is not obvious that total resource rents decrease human capital and found that the coefficient is no longer significant in the two-way fixed effects model. However, the analysis has emphasized the crucial role of political institutions in this relationship and has shown that countries with higher quality of institutions make the most of their resource rents transiting to a better human capital environment. This result is found to be robust to a list of controls, different specifications and estimation techniques, as well as several robustness checks. In addition, we demonstrate that not all resources affect human capital in the same way and found that oil rents have a significant negative effect on human capital. This is an important distinction since several countries are blessing from oil rents. From this we conclude that the effect of natural resources on human capital varies across different types of commodities. On the other hand, the interaction between institutions and the sub-categories of resource rents shows that oil rents can increase human capital only in developing countries with higher quality of institutions (above the threshold). This result is also still hold while using alternative measures of political institutions.Practical implicationsThe results in this paper have important policy implications. In particular, results highlight important heterogeneities in the role resource rents to the economy. As international commodity prices have shown high volatility in recent years, it is important for policy makers to understand the rents. Rents which are the difference between the price of a commodity and the average cost of producing it can have different effects in the economy, including the human capital. It is shown that in countries with low-quality institutions, natural resource rents negatively affect institutional quality, leading to conflicts, corruption and fostering rent-seeking activities. Overall, this reinforces the elite at the power that, obviously, is interested in preserving the status quo. In other words, there is a vicious circle between resource rents and low-quality institutions that impedes institutional change. How to regulate this in the best possible way requires a good understanding of how resource rents are generated and appropriated for different sectors, their different effects and how people react to these rents. The evidence suggests the policy toward better political institutions may help countries to improve social outcomes such as health and education which offer high social returns.Originality/valueThe paper is part of the author's PhD research and is an original contribution.

Determinants of Sustainable Open Innovations—A Firm-Level Capacity Analysis

Institutional constraints impede firms’ open innovation. They have been a challenge, obstructing growth and sustainable development. Research on open innovation has shown that the quality of institutions essentially affects innovation in firms. Hence, prior research has made efforts to incorporate the quality of institutions into open innovation analysis. We can use a series of analyses to examine the impact of corruption, the tax system, and other indicators on firm innovation performance. However, developing economies, such as countries in sub-Saharan Africa, represent a specific group of countries that have long been perceived as those mostly deficient in the rule of law, with poor regulatory quality and a great deal of corruption. In these countries, it is also possible to see a lower number of studies, as the inability to obtain quality data to perform empirical analyses can often limit researchers. Nevertheless, employing data from the World Bank’s 2019 Enterprise Survey, this research aimed at exploring the determinants of sustainable open innovation as well as the effect of institutional quality on firms’ capacity utilization and process innovation through a PLS structural equation model analysis. Our research showed interesting findings, such as the fact that the quality of institutions significantly affects firms’ use of OI instruments and capacity utilization. This research also provides for the novelty of the analysis of capacity utilization in an open innovation analysis. The results support the hypotheses that low institutional quality negatively affects firms’ implementation of inbound open innovation instruments, and that there is a strong and positive effect of low institutional quality on firms’ capacity utilization. In addition, we confirm the premise that firms’ implementation of inbound open innovation instruments has a positive and significant influence on firms’ process innovation.

ISLAMIC BANKING DEVELOPMENT AND FINANCIAL INCLUSION IN OIC MEMBER COUNTRIES: THE MODERATING ROLE OF INSTITUTIONS

This study argues that the effect of Islamic banking development on financial inclusion is enhanced when there exist better quality institutions. A cross section dependency test, cointegration test, causality test, and system GMM (generalized method of moments) are applied to achieve this objective. Employing panel data from 30 Organisation of Islamic Cooperation (OIC) member countries over the period 2013-2018, the analysis suggests that Islamic banking promotes financial inclusion. Furthermore, it documents evidence which suggests negative and significant coefficients of the interaction between Islamic banking development and institutional quality. This means that Islamic banking development works well in promoting financial inclusion in countries with low institutional quality.

Влияние качества институциональной среды на развитие реального и финансового секторов экономики Китая

The article examines the impact of the quality of the institutional environment on the development of the real and financial sectors of the economy. To assess the formation of the institutional environment, a set of qualitative and quantitative indicators was used. As indicators for assessing the development of the financial sector, it is proposed to use indicators of financial depth. Based on the use of correlation analysis tools, correlations between indicators of financial depth and indicators for assessing the formation of the institutional environment were identified. Based on the identified most significant correlations, taking into account institutional factors, diagnostic models were constructed, the use of which allowed us to build three forecast scenarios for changes in the financial depth of the Chinese financial system for the period up to 2030: optimistic, optimistic and basic. Arguments are presented that prove the weakness of the institutional environment of the Chinese economy, not only in comparison with the most developed economies, but also in emerging markets due to the preservation of certain characteristics of the transition economy, which hinders the development of the financial sector and market mechanisms. It is revealed that in the short term, further expansion of state participation in the Chinese financial market in a weak institutional environment may have a positive effect, but in the long term, an increase in state presence may become an obstacle to institutional development. Testing of the proposed tools of correlation analysis on the materials of the United States showed that indicators of the financial depth of the financial systems of developed countries with a high level of development of institutions have much weaker correlations with indicators of the formation of the institutional environment than in countries with emerging markets characterized by low quality of institutions.

Do the specific countries in which a multinational corporation operates affect its private loan contracts?

Previous research has shown that higher levels of firm globalization lead to a lower cost of private debt. However, this research generally treats globalization as a homogeneous attribute ignoring the specific countries in which a multinational corporation (MNC) operates. Using a sample of U.S. MNCs from 1999 through 2017, we relax this assumption and find that while the results from prior research hold with regards to the level of an MNC’s operations in segments reported at the regional or continent-wide level, the level of an MNC’s operations in countries with low institutional quality is associated with a higher cost of bank debt. Our results are robust to controlling for firms’ choice to operate in countries with low institutional quality using self-selection models and propensity score matching. In additional testing we find that the level of MNCs operations in countries with low institutional quality is negatively associated with the inclusion of collateral requirements in private lending agreements, but is not associated with the maturity of the loan or the number of covenants included in the lending agreement. Finally, we find that firms’ segment disclosure choices vary around new loan issuances in a manner consistent with management being aware that operations in low institutional quality are perceived by lenders to indicate higher credit risk.

Business and Human Rights: A Configurational View of the Antecedents of Human Rights Infringements by Emerging Market Firms

This study investigates the antecedents of human rights infringements (HRIs) by emerging market firms (EFs). We used fuzzy set qualitative comparative analysis (fsQCA) to examine HRIs in 245 firms based in eight emerging markets, between 2003 and 2012. Our findings disclose three equifinal configurations of high levels of HRIs, all involving EFs that have expanded to a high number of foreign markets: (i) large, old, low performing state-owned enterprises (SOEs) operating in high quality institutions’ home and host markets, (ii) small, young, over-performing EFs operating in low quality institutions’ home and host markets, and finally (iii) large, old, high performing SOEs, operating in low quality institutions’ home and host markets. We contribute to the literature by examining a novel dataset on HRIs by EFs, and by building a configurational explanation of HRIs that bridges the arguments of the institutional theory and strain theory literatures on corporate wrongdoing.

FDI, Stock Market Development and Institutional Quality: An African Perspective

This paper empirically sought to establish the existence of relationships between foreign direct investment, stock market development and institutional quality, respectively. The study adopted a multiple regression analysis, using a panel of nine African countries between 2009 and 2016. Using the random effects model, we find that the relationship between foreign direct investment and stock market development is positive and statistically significant. On the other hand, institutional quality reflected a negative effect on FDI inflows, implying that countries with low quality institutions would struggle to attract inward FDI. The policy implications are that host countries’ policy makers should eliminate or reduce any practices that deter foreign direct investments, such as capital controls and risk of expropriation (institutions), while simultaneously improving the domestic financial infrastructure and related regulations.

What Explains Geographic Variation in Corporate Investment?

We show that institutions can explain geographic concentration over and above agglomerative forces. This paper uses within country variation in institutional quality, combined with a local identification approach and instrumental variable strategy to explain spatial differences in investment. We use direct (indirect) British rule as proxies for areas with low (high) institutional quality. Institutions can explain 13% of total geographic variation in investment. Moreover, investment is 8-10% lower in areas with low institutional quality. Differences in institutional quality manifest as greater court delays, impeding contractual claims, property rights, and dispute resolution, thereby decreasing investment and increasing project abandonment.

Myanmar’s Manufacturing Exports After the Lifting of Economic Sanctions

This article aims to evaluate Myanmar’s exports of manufacturing products by using a gravity trade model for emerging ASEAN economies. The main focus of this study is to assess whether Myanmar’s manufacturing exports have recovered in terms of the gravity trade standard of the other emerging ASEAN countries for the post-sanction period of 2013–2018. Unlike the previous studies, this article contributes to the literature by targeting the post-sanction period and by applying both in-sample and out-of-sample estimation methods to ensure the consistency and robustness of their results. The main findings from the gravity trade model estimation are summarised as follows: first, Myanmar’s manufacturing exports for the post-sanction period are still significantly below the level of the gravity trade standard. Second, the downward deviation from the standard could be explained by the two Myanmar-specific factors, that is, the low institutional quality and the Dutch Disease effect in Myanmar’s exports to Western countries, but not fully in those to Asian countries. The additional factor for the deviation against Asian countries might come from Myanmar’s sluggish participation in the international production networks. JEL Codes: F14, O53

China's outward foreign direct investment in the Belt and Road Initiative: What are the motives for Chinese firms to invest?

Because of the potentially large and important effects of the extremely ambitious Belt and Road Initiative (BRI) launched by China in late 2013, considerable attention has been given to the motives for, and repercussions of, the BRI-driven infrastructural projects. Yet, the non-infrastructural outward foreign direct investment (FDI) from China to BRI countries, which varies quite substantially across different sectors and different countries, has not yet received much attention. In contrast to some recent studies showing that the massive initiative has increased China's total FDI outflows to fellow BRI countries, in this paper, based on our sector-level difference-in-differences models, we find that effect to be statistically insignificant. Yet, at the same time, we provide empirical evidence on the sectoral pattern of China's outward FDI before and after 2014 indicating that China's FDI outflows to BRI countries have significantly increased in sectors characterized by overcapacity and contributing to pollution in China, thereby demonstrating that China's BRI-driven outward FDI has been very selective in terms of sectors. We confirm these findings with a variety of robustness checks and show that it is BRI countries with relatively low institutional quality that have been more likely to receive these types of FDI from China. We thus speculate that Chinese firms have been motivated to place FDI investments in BRI countries for the sake of alleviating China's own overcapacity and pollution problems. Our findings lead us to suggest that, although these sectoral patterns are consistent with the different stages of economic development in which China and its fellow BRI-identified countries find themselves, Chinese investors and host country governments should be more concerned with the potential for unwanted side-effects of the FDI investments so that the mutually beneficial effects of the BRI can be sustained into the indefinite future among all countries involved.

Disentangling regional innovation capability: what really matters?

ABSTRACT Where does innovation come from? And do all regions innovate similarly? We deal with these questions by highlighting the complexity of the concepts of innovation capability and performance, and by testing their association at the European Union regional level. We disentangle inputs of innovation capability, and consider regional heterogeneity in institutional quality, to understand the relative endowment of what innovation inputs is associated with higher relative innovation performance. We find that ‘formal’ inputs – public and business R&D expenditure – do not work unconditionally and everywhere, and that less ‘formal’ ones – e.g., non-R&D expenditure and firms collaborating for innovation – matter particularly in regions with relative low-quality institutions. Moreover, institutional quality emerges as an innovation productivity-enhancing factor.

Market Manipulation in East-Asian Markets: A Regulatory Overview

This paper systematically reviews and examines the regulatory perspective of market manipulation in East Asian emerging markets. Keywords such as market manipulation, corporate fraud, market misconduct, financial regulations, corporate governance practices, institutional quality, and enforcement system for a search in the prominent academic literature databases are used. The studies related to the market misconduct and regulatory overview tied with these keywords are identified and selected for the systematic review. The review of extant literature suggests that the regulators are playing an important role in regulating the market to prevent market manipulation and market misconduct. The review also suggests that emerging economies are facing the issue of low institutional quality, absence of law enforcement agencies in the enforcement process, and definitional vagueness in relation to market manipulation. However, the findings suggest that enforcement mechanisms against market manipulation may discourage market abuses in both emerging and developed markets. The findings of this research offer some challenges and future directions in case of future market manipulation that potentially affect the market integrity of the firms. Notably, the technological changes in the financial markets often lead to regulatory challenges.