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.
References
Abu-lila, Z. M. (2021). Determinants of investment in the Jordanian productive sectors. Journal of Asian Finance, Economics and Business, 8(4), 0635–0641
Adama, C. (2016). The main determinants of private investment in WAEMU zone: a dynamic approach. MPRA Paper No. 75428
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.
Agyei S. K. (2017). Explaining public investment dynamics in sub-Saharan Africa: the role of country governance structure.Cogent Economics Research Article 5:1323987.
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 1/29 page.
Arrelano, M. and Bond, S. (1991). Some tests of specification for panel data: Monte-Carlo evidence and application to employment equations. The Review of Economic Studies, 58, 277-297.
Asongu, S. A., Kossele, Y. &Nnanna, T. (2021). Not all that is gold: political stability and private investment in Africa. MPRA Paper No. 109837.
Baltagi, B.H. (2005). Econometric analysis of panel data.Third Edition, Southern Gate, John Wiley & Sons Ltd.
Baum, C.F. (2006). An Introduction to Modern Econometrics Using Stata. Texas, AStata Press Publication.
Berttaile, B., Hernandez, F. L. &Noranbuna, V. (2015). Macroeconomic and policy management. Policy Research Paper No. 7523, World Bank Group
Blundell, R.W. and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel models.Journal of Econometrics, 87, 115-143.
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.
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.
Cieslik, A. &Goczek, L. (2018). Control of corruption, international investment and economic growth: evidence from panel data. World Development, 103, 323-35.
Colesbourne, J. (2012). An appraisal of Robert Keohane: Neoliberalism and liberal institutionalism. E-International Relations. 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
Daniel, O. and 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 recherchessur le développement in ternational, 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 Economic and Finance 9:/890367, 1-10.
Fayissa, B. &Nsiah (2010). The impact of governance on economic growth: further evidence for Africa. Department of Economics Working Paper Series No.12
Hartag, C., Van-Stel, A. and Storey, D. J. (2010). Institution and entrepreneurship: the role of rule of law. A Paper Presented and Published by EIM Scientific Analysis of Entrepreneurship and SMEs, H201003 No. 20 Etermeer, Netherlands
Harvey, D. (2005). A brief history of neoliberalism. Oxford University Press.
Iheonu, C. O. (2019). Governance and DPI in Africa.an 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 Submitted to Universitat de Barcelona, May.
Jolliffe, I. T. (2002).Principal Component Analysis (2nd Ed.) New York: Springer.
Judson, R. A. & Owen, A. L. (1999).Estimating dynamic panel models: a guide for macroeconomists.Economics Letters, 65, 9-15.
Kaiser, H. F. (1974). “An index of factorial simplicity” Psychometrika39, 31–36.
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.
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, CMI CHR Michelson Institute
Lin, J. Y. (1989). An economic theory of institutional change: induced and imposed change. Cato Journal, 9(1), 4-7
Ndungu, J. and 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).Institution and economic development.World Development Review, 17(9), 1333-1347.
OECD, (2021). Organization for economic cooperation and development. databank.oecd.org
Ojeka, S., Adegboye, A., Adegboye K., Umukoro, O. and Dahunsi, O. (2019).Corruption, institutional quality and performance of listed companies in Nigeria.Heliyon, 5, 1-10.
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, Vol. 12(2) 217-230.
Otuo, S. A., Millicent, K., Abraham, A. and Siaw, F. (2017). Institutional structure and the strength of investors’ confidence in Africa.International Journal of Law and Management, 59(6), 899-915.
Ouedraogo, I. M. and Kouaman, P. T. (2014), Governance and private investment in sub-Saharan Africa.International Journal of African Development, 2(1), 05-25
Quan, V. L. and Rishi, M. (2010).Examining the dimension of governance that is relevant for private investment.BEH-Business and Economic Horizons, 2 (1), 1-5.
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 Published by University of Economics in Bratislava
Tharanga, S. (2018).Impact of governance on economic growth.MPRA Paper No. 89834 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.
WDIs (2021).World development indicators.https://databank.worldbank.org
WGIs, (2021).World governance indicators. https://databank.worldbank.org
World Bank. (2020). Lasting Scars of the COVID-19 Pandemic. Global economic prospects, 143–88. June. Washington, DC: World Bank.
Yildirim, A. and Gokalp, M. F. (2016). Institution and economic performance: a review on developing countries. Elsevier Procedia Economics and Finance 38, 347-359.
Zouhaier, H., & Kefi, M. K. (2012). Interaction between political instability and private investment. Journal of Economics and International Finance, 4(2), 49–52.
Downloads
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
UMYU-JAFR recognizes the importance of protecting authors’ intellectual property while promoting the free exchange of knowledge. The journal adopts a copyright-retention model that empowers authors to maintain ownership of their work while granting the journal rights necessary for publication and dissemination.
1. Copyright Ownership
Authors publishing with UMYU-JAFR retain full copyright and publishing rights to their work. By submitting a manuscript, authors agree to grant the journal a non-exclusive license to publish, reproduce, distribute, and archive the article in all forms and media for the purpose of scholarly communication.
2. Licensing Terms
All articles are published under the Creative Commons Attribution–NonCommercial (CC BY-NC) license. This license permits others to share and adapt the material for non-commercial purposes only, provided that proper credit is given to the original author(s) and UMYU-JAFR as the source. Commercial reuse requires written permission from both the author and the editorial office.
3. Author Rights
Authors are free to deposit all versions of their manuscript in institutional or public repositories without embargo, use their published article for teaching and conference presentations, and include their work in future theses or compilations, provided proper citation to the journal is made.
4. Publisher’s Rights
Upon publication, UMYU-JAFR retains the right to host, index, and disseminate the article through its website and partner databases, and to archive the content in long-term preservation systems.
