The heterogeneous impact of local institutions on firms. Evidence from the World Bank Enterprise Survey

We investigate the extent to which regional Institutional Quality (IQ) shapes firms’ productivity using data drawn from the Enterprise Survey over the period 2018–2020 on a cross-section of firms operating in Central, Eastern Europe and North Africa countries. After building four IQ indexes accounting for the regional endowment of rule of law, control of corruption, government effectiveness and regulatory quality, we test the hypothesis that the relationship between institutions and productivity might be heterogeneous– weaker or stronger– according to country’s economic development and firms’ features. We find that regional IQ positively affects firms’ productivity. In particular, the rule of law and control of corruption turnout to be the most robust institutional determinants of productivity levels. In addition, our results indicate that the impact of IQ varies according to the level of economic development and, third, to firms’ features: the most productive firms located in poorer countries and the least productive small firms operating in the richest countries are more favourably affected by good IQ. These findings provide more robust policy recommendations for better-tailored institutional reform strategies across different economic contexts, enhancing the effectiveness of international development policies, foreign programs and regional integration efforts.