The Influence of Public Spending on Private Investment in Developing Economies: Does Institutional Quality Matter?

Аннотация

The role of institutional quality in the relationship between public spending and private investment is a controversial theme because institutional quality can mitigate the crowding-out impact of government expenditure on the private sector's investment. Does institutional quality contribute to public spending – private investment nexus in developing countries? This paper provides the answer by studying the role of governance quality in government spending – private investment nexus for a panel dataset of 98 developing countries over the period 2002–2020. It uses the system/difference GMM estimators for robustness checks and estimation. The empirical results seem counter-intuitive. Institutional quality and public spending increase private investment, while interaction decreases. The paper looks at somearguments to explain and suggests policy implications to improve institutional quality and enhance private investment.