An Experimental Study of the Interaction between Institutions and Standard Economic Variables on Explaining Income Growth

Identification of the impact mechanisms of institutional factors to explain income differences among countries indicates the importance of institutional economics. Following the methodology proposed by Coe et al (2009)، and using Panel data Two-Stage Least Square (Panel TSLS)، this study tries to interpret the interaction between institutional factors and indices (such as governance and indicators for doing business) and standard economic variables and its impact on the growth of per capita income across 12 countries in Asia and Middle East during the period spanning from 1996-2012. The dependent variable in this model is the logarithm of real income per capita، which is modeled as a function of the various interactions among institutional indices، R&D expenditures، net FDI flow، the degree of openness of the economy، and some other standard variables; such as human capital and investment in physical and natural resources. Econometric findings indicate that the general quality of institutions will affect the income per capita growth through indirect channels which are R&D، FDI and Openness. Therefore، institutionalization of market mechanism، trade liberalization، and reduction in uncertainty and political risk will all have statistically significant effect on the growth of income in those countries.