Institutional Determinants of Domestic Investment: A GMM Panel Data Analysis

Abstract

Introduction :

Investment is a significant component of the aggregate demand that plays a vital role in the growth of output, employment, and productivity in the long- run. Over recent decades, the cross country variations in investment have been remarkable. As noted in Lim (2014), between 1980 and 2010, the variability in the rate of gross fixed capital formation ranged between 1 to 90 percent of GDP worldwide, the greater part of which has come from the developing countries that also exhibit higher diversity in terms of their institutional structures.

The conventional belief is that the accumulation of investment funds, labor growth, and productivity rise explain the growth rate of economies. The role of a sound institutional environment as an essential pre-condition to providing a healthy climate for factor accumulation and productivity growth is mostly neglected in the neoclassical theories of economic growth. However, recently, a big strand of literature emerged that has broadly acknowledged the importance of institutions for technological progress and innovation, FDI, financial development and more extensively for economic growth. A dynamic analysis of the impact of institutional quality for factor accumulation is far less discussed in the literature that demands further investigations.