Role of Institutional Quality Effectiveness in the Relationship Between Financial Development and Economic Complexity: Empirical Evidence from MENA Countries

Document Type : Research Paper

Authors

Assistant Professor, Department of Economic, Payam Noor University, Tehran, Iran

Abstract

Understanding the determinants of economic complexity is particularly important for countries in the Middle East and North Africa (MENA) region, which face significant challenges in keeping pace with rapid developments in the global economy. Although many researchers identify financial development as an influential factor on economic complexity, financial development alone may not be sufficient to achieve an extensive network of economic complexity without a dynamic institutional framework. Accordingly, this study aims to examine the impact of financial development on economic complexity, considering the role of institutional quality, in selected MENA countries over the period 2005–2021 using the Fully Modified Ordinary Least Squares (FMOLS) method. The results indicate that per capita GDP and institutional quality have a positive and significant impact on economic complexity. In contrast, the effect of the financial development index on economic complexity is negative and insignificant. However, the coefficient of the interaction term between financial development and institutional quality is positive and significant, suggesting that financial development can enhance economic complexity only within an efficient institutional framework. Additionally, the results show that research and development expenditures have a positive and significant effect on economic complexity

Keywords

Main Subjects

References

  1. Aghion, P., Blundell, R., Griffith, R., Howitt, P., & Prantl, S. (2009). The effects of entry on incumbent innovation and productivity. The review of economics and statistics, 91(1), 20-32.‏
  2. Aghion, L., Howitt, P., & Levine, R. (2018). Financial development and innovation-led growth. In Handbook of finance and development (pp. 3-30). Edward Elgar Publishing.‏
  3. Aslam, A., Ghouse, G., & Khan, B. (2022). The driver role of financial development on the economic complexity: An empirical evidence from 33 BRI Participation Countries. Audit and Accounting Review, 2(1), 25-45.‏
  4. Avom, D., & Ndoya, H. (2024). Does country stability spur economic complexity? Evidence from panel data. Applied Economics Letters, 31(4), 323-329.‏
  5. Azimi, H. (2014). A Look at the Problem of Poverty and Deprivation in Iran. Tehran: Imam Khomeini Relief Committee Publications (In Persian).
  6. Cheshmi, H., & Malek-al-Sadati, M. (2013). A comparative study of economic complexity in Iran, Turkey and South Korea. Economic Development Research, 13(1), 1–28 (In Persian)..
  7. Chu, L. K. (2020). The effects of financial development on economic sophistication: evidence from panel data. Applied Economics Letters, 27(15), 1260-1263.‏
  8. Creane, S., Mobarak, A. M., Goyal, R., & Sab, R. (2004). Financial sector development in the Middle East and North Africa.‏
  9. Fortunato, P., & Razo, C. (2014). Export sophistication, growth and the middle-income trap. Transforming economies: Making industrial policy work for growth, jobs and development, 267-287.‏
  10. Gujarati, D. (2013). Introductory Econometrics (translated by Hamid Abrishami). Tehran: Ney Publications (In Persian).
  11. Hafezian, F., Zamanian, Gh. R., & Shahraki, J. (2013). The Effect of Financial Development on the Balance Sheet Channel of Monetary Policy Transmission. Applied Theories of Economics, 9(2), 245–264 (In Persian).
  12. Hall, B. H., & Lerner, J. (2010). The financing of R&D and innovation. In Handbook of the Economics of Innovation (Vol. 1, pp. 609-639). North-Holland.‏
  13. Hausmann, R., & Rodrik, D. (2003). Economic development as self-discovery. Journal of development Economics, 72(2), 603-633.‏
  14. Hidalgo, C. A. (2021). Economic complexity theory and applications. Nature Reviews Physics, 3(2), 92-113.‏
  15. Hidalgo, C. A., & Hausmann, R. (2009). The building blocks of economic complexity. Proceedings of the national academy of sciences, 106(26), 10570-10575.‏
  16. Ho, S. Y., & Njindan Iyke, B. (2018). Financial development, growth and poverty reduction: Evidence from Ghana.‏
  17. Karimi Takanloo, Z., Farhang, A. A., & Mohammadpour, A. (1402). The effects of economic policy uncertainty, institutional quality and renewable energies on green growth: A case study of Iran. Applied Theories of Economics, 10(4), 65–102 (In Persian).
  18. Kletzer, K., & Bardhan, P. (1987). Credit markets and patterns of international trade. Journal of Development Economics, 27(1-2), 57-70.‏
  19. Lal, D. (2004). In praise of empires: Globalization and order (p. 248). New York: Palgrave Macmillan.‏
  20. Lapatinas, A. (2019). The effect of the Internet on economic sophistication: An empirical analysis. Economics Letters, 174, 35-38.‏
  21. Mohammadi Khiyareh, M., & Zivari, A. (2023). The impact of economic complexity on the economic growth of N-11 countries using the Panel ARDL approach. Economic Research Journal, 22(86), 1–35 (In Persian).
  22. Molana, S. M., Najafizadeh, A., Haji, Gh. A., & Sarlak, A. (2019). The role of financial development in poverty reduction in Iran using principal component analysis (PCA). Economic Policymaking, 11(2), 127–157 (In Persian).
  23. Nadiri, M., & Mohammadi, T. (2011). Investigating the Impact of Institutional Structures on Economic Growth Using the Dynamic Panel Data GMM Method. Economic Modeling, 5(15), 1–24 (in Persian).
  24. Nguyen, C. P., Schinckus, C., & Su, T. D. (2020). The drivers of economic complexity: International evidence from financial development and patents. International Economics, 164, 140-150.‏
  25. Nguyen, C. P., & Su, T. D. (2021). Financing the economy: The multidimensional influences of financial development on economic complexity. Journal of International Development, 33(4), 644-684.‏
  26. Njangang, H., Asongu, S., Tadadjeu, S., & Nounamo, Y. (2021). Is financial development shaping or shaking economic sophistication in African countries?. European Xtramile Centre of African Studies WP/21/018.‏
  27. Olaniyi, C. O., & Adedokun, A. (2022). Finance-institution-growth trilogy: time-series insights from South Africa. International Journal of Emerging Markets, 17(1), 120-144.‏
  28. Olaniyi, C. O., & Oladeji, S. I. (2022). Interplay between financial sector and institutional framework in the economic growth process of Kenya. Journal of Public Affairs, 22(3), e2562.‏
  29. Quartey, P. (2008). Financial sector development, savings mobilization and poverty reduction in Ghana. In Financial development, institutions, growth and poverty reduction (pp. 87-119). London: Palgrave Macmillan UK.‏
  30. Sepahvand, R., Sayemiri, A., & Shirkhani, A. (2013). The Effect of Economic Complexity on Environmental Performance in MENA Countries. Economic Research (Growth and Sustainable Development), 21(3), 177–208 (In Persian).
  31. Sepehrdoust, H., Davari Kish, R., & Setareyi, M. (2020). The role of government in the economic complexity of developing countries: Testing Baumol's unbalanced growth theory. Quantitative Economics Research Journal, 17(3), 117–143 (In Persian).
  32. Shahabadi, A., Chayani, T., & Sadeghi Motamedd, Z. (2020). The effect of the economic complexity index on total factor productivity in selected science-producing countries. Economics and Modeling, 11(1), 181–205 (In Persian).
  33. United Nations Conference on Trade and Development. (2007). The Least Developed Countries Report 2007: Knowledge, Technological Learning and Innovation for Development. UN.‏
  34. Xiao, S., & Zhao, S. (2012). Financial development, government ownership of banks and firm innovation. Journal of International Money and Finance, 31(4), 880-906.‏
  35. Yalta, A. Y., & Yalta, T. (2021). Determinants of economic complexity in MENA Countries. JOEEP: Journal of Emerging Economies and Policy, 6(1), 5-16.‏
  36. Yildirim, M. (2014). Diversifying growth in light of economic complexity. Brookings Blum Roundtable.‏
  37. Younsi, M., & Bechtini, M. (2018). Economic growth, financial development and income inequality in BRICS countries: Evidence from panel granger causality tests.‏
  38. Zameer, H., Shahbaz, M., & Vo, X. V. (2020). Reinforcing poverty alleviation efficiency through technological innovation, globalization, and financial development. Technological Forecasting and Social Change, 161, 120326.‏
  39. Zhu, S., & Li, R. (2017). Economic complexity, human capital and economic growth: empirical research based on cross-country panel data. Applied Economics, 49(38), 3815-3828.‏
  40. Zobeiri, H. (2020). Human capital and economic complexity in Iran. The Economic Research, 20(3), 145-166.‏

Files

Share

How to cite

Statistics