Role of Institutional Quality Effectiveness in the Relationship Between Financial Development and Economic Complexity: Empirical Evidence from MENA Countries

Seyed Hosein Izadi, Mohammad mehdi Zare Shahne, Ebrahim Bahraminia and Samaneh Norani Azad
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Seyed Hosein Izadi: Assistant Professor, Department of Economics, Payam Noor University, Tehran, Iran
Mohammad mehdi Zare Shahne: Assistant Professor, Department of Economics, Payam Noor University, Tehran, Iran
Ebrahim Bahraminia: Assistant Professor, Department of Economics, Payam Noor University, Tehran, Iran
Samaneh Norani Azad: Assistant Professor, Department of Economics, Payam Noor University, Tehran, Iran

Quarterly Journal of Applied Theories of Economics, 2025, vol. 12, issue 3, 81-102

Abstract: Understanding the determinants of economic complexity is particularly important for countries in the Middle East and North Africa (MENA) region, which face significant challenges in keeping pace with rapid developments in the global economy. Although many researchers identify financial development as an influential factor on economic complexity, financial development alone may not be sufficient to achieve an extensive network of economic complexity without a dynamic institutional framework. Accordingly, this study aims to examine the impact of financial development on economic complexity, considering the role of institutional quality, in selected MENA countries over the period 2005–2021 using the Fully Modified Ordinary Least Squares (FMOLS) method. The results indicate that per capita GDP and institutional quality have a positive and significant impact on economic complexity. In contrast, the effect of the financial development index on economic complexity is negative and insignificant. However, the coefficient of the interaction term between financial development and institutional quality is positive and significant, suggesting that financial development can enhance economic complexity only within an efficient institutional framework. Additionally, the results show that research and development expenditures have a positive and significant effect on economic complexity.

Keywords: Financial Development; Economic Complexity; Institutional Quality; FMOLS Method (search for similar items in EconPapers)
JEL-codes: E02 E44 O32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ris:qjatoe:023026

DOI: 10.22034/ecoj.2025.62366.3327

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