Is Tinkering with Institutional Quality a Panacea for Firm Performance? Insights from a Semiparametric Approach to Modeling Firm Performance

Abstract

There is a large and growing literature on the impact of institutional quality on economic performance and the broad consensus is that "good" institutions facilitate better economic performance. The literature that provides micro-level support for the policy discourse about institutional quality does not, however, account for significant intra-country variation in reactions of firms to changes in business environments, even within the same industry, and it generally ignores the possibility that the impact of institutional quality on firm performance may not be neutral. In this paper, we analyze the impact of institutions on firm performance using an approach that enables us to overcome these problems with the stylized approach. Using cross-country firm-level data, we demonstrate that not only does the marginal impact of institutional quality vary significantly within countries, but also that the impact is economically significant only at the two extremes of the distribution. We view this as prima facie evidence that policies that tinker with institutional quality on the basis of the popular wisdom about the impact of these institutions on the average firm may not have the desired or expected impact, at least at the micro level.

Internal capabilities, national governance and performance in African firms

“…This suggests that firms in well-governed country-years generally outperform their counterparts in poorly-governed country-years. These results are consistent with prior empirical studies which highlight the importance of NGQ for firm success (Ngobo and Fouda, 2012;Bhaumik et al, 2018;Tunyi and Ntim, 2016).…”

Do urbanization and public expenditure affect productivity growth? The case of Chinese Provinces

“…We call this model semiparametric smooth coefficient (SPSC) model (Li et al 2002;Li and Racine 2007;Bhaumik et al 2017), because the coefficients are smooth nonparametric functions of U. For details on the estimation of this model, see Li and Racine (2007), Bhaumik et al (2017). We used the np package in R to estimate the model.…”

“…The final component ½ob st =oU it t is the effect via the technical change parameter and the time trend. Although the b coefficients in ( 17) are nonparametric functions of U, it is possible to take derivatives of them (see, for example, Li and Racine (2007) as well as Bhaumik et al (2017) for details). As in the translog case, we can examine whether the relationship between urbanization and output is inverted U-shaped or not by examining elasticity of output with respect to U (i.e., o ln Y=oU).…”

“…Bhaumik et al (2017) discuss estimation of the partially linear model as well as estimation of the marginal effects of the variables that appear in the nonparametric part. The estimation is done using the np package in R.4 Although the translog function is widely used in the literature, to our knowledge, this is used first time it is used to examine the UKC relationship.…”

Does the Institutional Quality Affect Labor Productivity in Italian Vineyard Farms?

“…In the last decades, institutional factors have attracted great interest as one of the main determinants of economic performance of countries and regions [1,2,3,4]. A large literature has emphasized the role of institutions in influencing both inputs (physical and human capital) and productivity, thus focusing on the existence of an additional effect of institutions on the per capita Gross Domestic Products (through productivity changes).…”