Institutional Quality and Macroeconomic Policies Impact on Domestic Private Investment Evidence from High, Middle and Low-Income Countries
DOI:
https://doi.org/10.61143/umyu-jafr.7(1)2024.009Keywords:
Domestic Private Investment, Institutional Quality, Macroeconomic PoliciesAbstract
The study examined the impact of institutional quality (proxy by an index of six governance indicators and property rights index) and macroeconomic policies on domestic private investment (DPI) proxy by gross fixed capital formation, utilizing annual panel datasets spanning from 2005 to 2021 across sixty countries of the globe with varying income levels. The study adopts Principal Component Analysis (PCA) to develop an index for quality of governance and dynamic GMM approach for the analysis. The study findings revealed that quality of governance's impact on DPI is evident in high and middle-income economies (0.40089 and -0.00216), and property rights have a significant impact (-0.00767) solely in the low-income group at a 1% significance level. Macroeconomic variables highlight GDP's influence (0.01962) in the high-income groups, trade openness (5.07281 and 0.12511) in high and low-income countries at 1% and 5% significance levels, and exchange rate affects (-0.03487, and 0.01694) in the middle, and low-income economies, respectively. For the crowding effect, FDI positively crowd-in DPI (0.30389) in middle-income economies at 1% significance levels, whereas the crowding-out effect is evident in high-income countries (-0.18799) at 5% level of significance. In conclusion, enhancing governance quality, implementing sound monetary and fiscal policies, reducing trade barriers, promoting free trade, and facilitating technology transfer to local investors are vital steps to stimulate private sector participation in economic growth and mitigate the crowding-out effects of FDI on DPI.
Metrics
References
Abu-lila, Z. M. (2021). Determinants of investment in the Jordanian productive sectors. Journal of Asian Finance, Economics and Business, 8(4), 635–641.
Adama, C. (2016). The main determinants of private investment in WAEMU zone: A dynamic approach (MPRA Paper No. 75428). Munich Personal RePEc Archive.
Adu-Gyamfi, G., Nketiah, E., Obuobi, B., & Adjei, M. (2020). Trade openness, inflation, GDP growth and private investment: Panel data evidence from nine (9) West Africa countries. Journal of Business and Management, 8, 314–328. https://doi.org/10.4236/ojbm.2020.81019
Agyei, S. K. (2017). Explaining public investment dynamics in sub-Saharan Africa: The role of country governance structure. Cogent Economics & Finance, 5(1), 1323987. https://doi.org/10.1080/23322039.2017.1323987
Albalate, D., Bel, G., & Geddes, R. (2018). Do public-private partnership enabling laws increase private investment in infrastructure? (Research Institute of Applied Economics Working Paper). Av. Diagonal, 690.08034 Barcelona.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and application to employment equations. The Review of Economic Studies, 58(2), 277–297. https://doi.org/10.2307/2297968
Asongu, S. A., Kossele, Y., & Nnanna, T. (2021). Not all that is gold: Political stability and private investment in Africa. MPRA Paper No. 109837. https://doi.org/10.2139/ssrn.3765926
Baltagi, B. H. (2005). Econometric analysis of panel data (3rd ed.). John Wiley & Sons Ltd.
Baum, C. F. (2006). An introduction to modern econometrics using Stata. Stata Press.
Berttaile, B., Hernandez, F. L., & Noranbuna, V. (2015). Macroeconomic and policy management (Policy Research Paper No. 7523). World Bank Group.
Blundell, R. W., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Brett, E. A. (2002). Liberal theory, uneven development and institutional reform: Response to the.
Budang, N. A. B., & Abd-Hakim, T. (2019). The crowding effects of foreign direct investment on domestic investment: Evidence from Asia. International Journal of Business and Economic Development, 7(2), 29–38. https://doi.org/10.24052/IJBED/V07N02/ART-04
Chuku, C., Onye, K., & Ajah, H. (2017). Structural and institutional determinants of investment activities in Africa. In D. Seck (Ed.), Investment and competitiveness in Africa (pp. 1–20). Springer International Publishing. https://doi.org/10.1007/978-3-319-44787-2_2
Cieslik, A., & Goczek, L. (2018). Control of corruption, international investment, and economic growth: Evidence from panel data. World Development, 103, 323–335. https://doi.org/10.1016/j.worlddev.2017.10.028
Colesbourne, J. (2012). An appraisal of Robert Keohane: Neoliberalism and liberal institutionalism. Retrieved from https://www.e-ir.info/2012/12/22/an-appraisal-of-robert-keohane-neoliberalism-and-liberal-institutionalism-in-world-politics
Combey, A. (2016). The main determinants of private investment in WAEMU zone: A dynamic approach (MPRA Paper No. 75428). Munich Personal RePEc Archive.
Daniel, O., & Diego, R. (2017). Legal reforms and economic performance: Revisiting the evidence. A background paper for the World Bank Development Report on Governance and Law.
Diallo, A., Jacolin, L., & Rabaud, I. (2021). Foreign direct investment and domestic private investment in sub-Saharan African countries: Crowding-in or out? Fondation pour les Études et Recherches sur le Développement International, Development Policies Working Paper No. 292.
Ellahi, N., Kiani, A., Malik, Q., Raza, A., & Gul, R. (2018). Institutional governance and financial sector development: Panel evidence from Asian economies. Cogent Economics & Finance, 9(1), 1890367. https://doi.org/10.1080/23322039.2021.1890367
Fayissa, B., & Nsiah, C. (2010). The impact of governance on economic growth: Further evidence for Africa (Department of Economics Working Paper Series No. 12).
Hartog, C., Van Stel, A., & Storey, D. J. (2010). Institutions and entrepreneurship: The role of the rule of law (EIM Scientific Analysis of Entrepreneurship and SMEs, H201003 No. 20). Etermeer, Netherlands.
Harvey, D. (2005). A brief history of neoliberalism. Oxford University Press. https://doi.org/10.1093/oso/9780199283262.001.0001
Iheonu, C. O. (2019). Governance and DPI in Africa (African Governance and Development Institute Working Paper No. WP/19/001). Yaounde.
Institutional quality and macroeconomic policies impact on domestic private investment evidence: From high, middle and low-income countries. (n.d.). Page 105.
Javed, O. (2015). Essay on institutional quality, macroeconomic stabilization, and economic growth in IMF member countries [Unpublished PhD thesis]. Universitat de Barcelona. https://doi.org/10.1007/978-3-319-29178-9_3
Jolliffe, I. T. (2002). Principal component analysis (2nd ed.). Springer.
Judson, R. A., & Owen, A. L. (1999). Estimating dynamic panel models: A guide for macroeconomists. Economics Letters, 65(1), 9–15. https://doi.org/10.1016/S0165-1765(99)00130-5
Kaiser, H. F. (1974). An index of factorial simplicity. Psychometrika, 39(1), 31–36. https://doi.org/10.1007/BF02291575
Kaplan, F., & Yaprakli, S. (2014). The impacts of the institution, openness and macroeconomic growth: A panel data analysis of middle-income countries. Ekonometri ve Istatistik, 20, 104–123. https://doi.org/10.2139/ssrn.2533708
Keino, I. J., Kiprop, S., Kalio, A., & Kibet, L. (2018). The effect of regional integration on private investment in East African community: A panel data approach. International Journal of Development and Economic Sustainability, 6(4), 51–62.
Kolstad, I., & Wiig, A. (2009). What determines Chinese outward FDI? (CMI Working Paper No. 2009:3). Chr. Michelsen Institute.
Lin, J. Y. (1989). An economic theory of institutional change: Induced and imposed change. Cato Journal, 9(1), 4–7.
Ndungu, J., & Mariu, P. W. (2017). Does a good institution matter for private investment? Evidence from East Africa. Journal of Economics and Sustainable Development, 8(6), 18–30.
North, D. C. (1989). Institutions and economic development. World Development Review, 17(9), 1333–1347. https://doi.org/10.1016/0305-750X(89)90076-4
OECD. (2021). Organization for Economic Cooperation and Development. Retrieved from https://databank.oecd.org
Ojeka, S., Adegboye, A., Adegboye, K., Umukoro, O., & Dahunsi, O. (2019). Corruption, institutional quality, and performance of listed companies in Nigeria. Heliyon, 5(6), e02569. https://doi.org/10.1016/j.heliyon.2019.e02569
Okwu, A. T., Oseni, I. O., & Obiakor, R. T. (2020). Does foreign direct investment enhance economic growth? Evidence from 30 leading global economies. Global Journal of Emerging Market Economies, 12(2), 217–230. https://doi.org/10.1177/0974910120919042
Otuo, S. A., Millicent, K., Abraham, A., & Siaw, F. (2017). Institutional structure and the strength of investors' confidence in Africa. International Journal of Law and Management, 59(6), 899–915. https://doi.org/10.1108/IJLMA-03-2016-0033
Ouedraogo, I. M., & Kouaman, P. T. (2014). Governance and private investment in sub-Saharan Africa. International Journal of African Development, 2(1), 5–25.
Quan, V. L., & Rishi, M. (2010). Examining the dimensions of governance that are relevant for private investment. BEH - Business and Economic Horizons, 2(1), 1–5. https://doi.org/10.15208/beh.2010.01
Seetanah, B., Matadeen, J., Fauzel, S., & Kheshansing, G. (2018). Does FDI crowd in or crowd out domestic investment? Evidence from African economies. EDAMBA@EUBA Conference Proceedings. University of Economics in Bratislava.
Tharanga, S. (2018). Impact of governance on economic growth (MPRA Paper No. 89834). Munich Personal RePEc Archive. http://mpra.ub.uni-muenchen.de/89834
Ucan, O. (2014). The determinants of investment: Panel data analysis of G7 countries. European Journal, 1(1), 28–35.
Uzum, P., Omankhanlen, A. E., & Ehikioya, B. I. (2021). Enabling stock market development in Africa: A review of the macroeconomic drivers. Investment Management and Financial Innovations, 18(1), 357–364. https://doi.org/10.21511/imfi.18(1).2021.29
World Bank. (2020). Lasting scars of the COVID-19 pandemic. Global economic prospects (pp. 143–188). World Bank. https://doi.org/10.1596/978-1-4648-1553-9
World Bank. (2021). World development indicators. Retrieved from https://databank.worldbank.org
World Bank. (2021). World governance indicators. Retrieved from https://databank.worldbank.org
Yildirim, A., & Gokalp, M. F. (2016). Institutions and economic performance: A review on developing countries. Procedia Economics and Finance, 38, 347–359. https://doi.org/10.1016/S2212-5671(16)30207-6
Zouhaier, H., & Kefi, M. K. (2012). Interaction between political instability and private investment. Journal of Economics and International Finance, 4(2), 49–52. https://doi.org/10.5897/JEIF11.127
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 UMYU Journal of Accounting and Finance Research
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
