The role of institutions in private investment: panel data evidence

Fanyu Chen, Siong Hook Law, Zi Wen Vivien Wong and W.N.w Azman-Saini

Studies in Economics and Finance, 2021, vol. 39, issue 4, 630-643

Abstract: Purpose - This study aims to examine the effects of institutions on private investment (PI) using panel data analysis, where the sample countries consist of 100 countries around the world and the time period is covering from 2007 to 2016. The system generalized method of moments (GMM) estimator, introduced by Arellano and Bond (1991) and further developed by Blundell and Bond (1998) is used to analyze the data sets. Design/methodology/approach - This study uses the panel data approach to estimate the empirical model due to the panel nature of the data. In particular, due to the presence of lagged dependent variables and the ability to capture individual country-specific effects, the system GMM estimator, introduced by Arellano and Bond (1991) and further developed by Blundell and Bond (1998), is adopted to analyze the roles of institutions in PI. The system GMM is developed specifically to solve the problems of weak instruments and persistency (Blundell and Bond, 1998). Jointly, they suggest to adopt additional moment conditions where lagged difference of the dependent variable is orthogonal to the level form of the disturbances. The system GMM estimator is able to combine the moment conditions for the different models, as well as the level model, thereby (is capable of) generate consistent and efficient parameters. Due to the dynamic nature of the data, this study uses one-step and two-step system GMM to investigate the roles of institutions in PI. Findings - The empirical results based on the two-step system GMM demonstrate that the quality of institutions plays an important role in stimulating PI. The finding is reinforced by the analysis of the institutional sub-components’ effects on PI. Originality/value - This study is unique as its measurement of institutions is multi-dimensional (including law and order, rules and regulation, government stability, bureaucratic quality, control of corruption, socio-economic condition, etc.), and hence are more comprehensive. Second, it is different than the previous studies as its sample of countries includes both democracies and non-democracies, as well as both developed and non-developed economies in which policy implications are widely acceptable. Third, this study contributes to the policymakers especially those in the debt-ridden economies where governments are budget-tightening (limited capacity for public investment), as to which practical direction should be focused on so as to attract PI and eventually sustainable growth can take place.

Keywords: Institutions; Private investment; Generalized method of moments estimator; B4; E2; H1; K4; O1 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-09-2020-0381

DOI: 10.1108/SEF-09-2020-0381

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