Nexus between Institutional Quality and Capital Inflows at Different Stages of Economic Development

• Published date: 01 June 2019
• Date: 01 June 2019
• DOI: http://doi.org/10.1111/irfi.12169
• Author: Seyed Alireza Athari,Cahit Adaoglu

Nexus between Institutional

Quality and Capital Inflows at

Different Stages of Economic

Development

SEYED ALIREZA ATHARI

†

AND CAHIT ADAOGLU

‡

†

Department of Banking and Finance, Faculty of Business, Girne American University,

Kyrenia, North Cyprus, Turkey and

‡

Department of Banking and Finance, Faculty of Business and Economics, Eastern

Mediterranean University, Famagusta, North Cyprus, Turkey

ABSTRACT

We examine the determinants of capital inflows for a global sample of coun-

tries at various stages of economic development, namely factor-, efficiency-,

and innovation-driven stages. We investigate the effect of institutional qual-

ity on capital inflows. The magnitude of institutional quality effect depends

on the stage of economic development. Both public and private institutional

qualities positively affect capital inflows in efficiency- and innovation-driven

countries. Specifically, corporate ethics and accountability are pull factors for

capital inflows at all stages.

JEL Codes: F21; F63; G34; G38

Accepted: 1 December 2017

I. INTRODUCTION

In its global competitiveness reports, the World Economic Forum (WEF) clas-

sifies countries based on their stage of economic development. Countries are

classified into three main stages: factor-, efficiency-, and innovation-driven

stages.

1

In this study, we apply the traditional capital flows model (Fernandez-Arias

1996) for these three groups of countries. Specifically, we focus on the institu-

tional quality (IQ) indicators as the pull factors for capital inflows (CI). In

regard to the determinants of CI, there is a gap in the current literature, which

does not focus extensively on the effects of country-specific factors. For

instance, some studies (e.g., De Santis and Lührmann 2009; Binici et al. 2010;

Byrne and Fiess 2016) provide evidence that the overall IQ is a significant

1 For more information, see http://reports.weforum.org/global-competitiveness-report-2014-

2015/methodology/

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 19:2, 2019: pp. 435–445

DOI: 10.1111/irfi.12169