Does Institutional Quality Foster Economic Complexity?

By Trung V. Vu. Social Science Research Network, 2019

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This paper examines the extent to which the quality of institutions, measured by the Economic Freedom of the World index, helps shape cross-country differences in economic complexity. To this end, I employ the intensity of ultraviolet radiation (UV-R) to isolate an exogenous source of variation in institutions, which helps circumvent endogeneity concerns. Empirical results indicate that the exogenous component of institutional quality exerts a strong and robust positive effect on economic complexity. The findings prevail after performing a battery of robustness tests. Furthermore, I find that institutions affect economic complexity by inducing human capital accumulation and strengthening incentives for innovative activities.

Subfields: Business and International Management, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/13de14b0a0eddf4cf1cf86ea37a7d69461277441