Does Institutional Quality Affect Firm Performance? Insights from a Semi-Parametric Approach

Sumon Bhaumik, Ralitza Dimova (), Subal Kumbhakar and Kai Sun

No wp1029, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: Using a novel modeling approach, and cross-country firm level data for the textiles industry, we examine the impact of institutional quality on firm performance. Our methodology allows us to estimate the marginal impact of institutional quality on productivity of each firm. Our results bring into question conventional wisdom about the desirable characteristics of market institutions, which is based on empirical evidence about the impact of institutional quality on the average firm. We demonstrate, for example, that once both the direct impact of a change in institutional quality on total factor productivity and the indirect impact through changes in efficiency of use of factor inputs are taken into account, an increase in labor market rigidity may have a positive impact on firm output, at least for some firms. We also demonstrate that there are significant intra-country variations in the marginal impact of institutional quality, such that the characteristics of “winners” and “losers” will have to be taken into account before policy is introduced to change institutional quality in any direction.

Keywords: Institutional quality; Firm performance; Marginal effect; Textiles industry (search for similar items in EconPapers)
JEL-codes: C14 D24 K31 O43 (search for similar items in EconPapers)
Pages: pages
Date: 2012-02-01
New Economics Papers: this item is included in nep-bec, nep-cse and nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Does Institutional Quality Affect Firm Performance? Insights from a Semiparametric Approach (2012)
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