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Institutions and gravity model: the role of political economy and corporate governance

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Abstract

Using panel data on 166 countries, this paper analyzes the effects of corporate governance, employment protection, investor protection, and political environments on the exporting performance. Our gravity model predicts that stronger democratic political institutions encourage exports. We also find that stronger rule-based corporate governance imposes positive impact on the export performance. We also note that stronger employee protection, and therefore, rigid labor regulations can distort the exporting decision of firms. In addition, a stronger shareholder protection tends to be associated with lower exports, probably attributed to lower innovative activity. We interpret these results as an indication that (i) countries with a higher quality of institution suffer from less formal and informal trade barriers, which make international trade relations easier, and (ii) both the employee protection and the shareholder protection, on the other hand, trivialize the country’s export.

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Notes

  1. Anderson and Marcouiller (2002) find the evidence that better institution of trading partners leading to larger trade volumes. One reason to incorporate institutional quality of importing countries is that good quality of institution of the importing country can decrease shipments of exporting countries.

  2. For detailed measures and scales of institutional factors please refer to Pagano and Volpin (2005).

  3. Note that exp (1.278) = 3.49.

  4. Note that exp (0.343) = 1.41.

  5. Note that exp (0.501) = 1.65.

  6. It is important to note that the legislative and executive indices of electoral competitiveness (liec) is a categorical variable which consists of 7 scales: (1) no executive/legislature, (2) unelected executive/legislature, (3) elected, one candidate, (4) one party, multiple candidates, (5) multiple parties are legal, but only one won seats (because other parties did not exist, compete, or win seats), (6) multiple parties competes and won seat (but one party one 75% or more of the seats), (7) the largest party received less than 75% of the seats.

  7. The indicator is based on the answers to questionnaires sent to legal experts and business practitioners around the world by Pagano and Volpin (2005). Detailed text of the questionnaire is reported in the Web Appendix in Table A1 of Pagano and Volpin (2005).

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Authors and Affiliations

  1. Faculty of Political Sciences, Istanbul Medeniyet University, Istanbul, Turkey

    Mehmet Huseyin Bilgin & Giray Gozgor

  2. Newcastle Business School, Northumbria University, Newcastle Upon Tyne, UK

    Chi Keung Marco Lau

Authors
  1. Mehmet Huseyin Bilgin
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  2. Giray Gozgor
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  3. Chi Keung Marco Lau
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Corresponding author

Correspondence to Giray Gozgor.

Appendices

Appendix 1

See Table 3.

Table 3 List of countries in the study
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Appendix 2

See Table 4.

Table 4 Description of institutional variables
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Bilgin, M.H., Gozgor, G. & Lau, C.K.M. Institutions and gravity model: the role of political economy and corporate governance. Eurasian Bus Rev 7, 421–436 (2017). https://doi.org/10.1007/s40821-016-0069-x

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