Institutional Shielding under Uncertainty: Governance Quality and Investment Behavior in Asian Economies

Abstract

The authors conduct a study regarding how the quality of governance influences the influence of uncertainty on investment behavior within the sample of three Asian economies. Based on uncertainty investment theories and the institutional theory, we assume that quality governance institutions can protect economies against the negative impacts of macroeconomic uncertainty and political uncertainty thus stabilizing investment flows. To make the results robust we estimate panel data (2000-2022) of 15 Asian countries using fixed-effects, random-effects, and dynamic system GMM estimations. We find that uncertainty has a negative effect on the investment level but this effect is highly mitigated in samples with a higher quality of governance especially with regard to regulatory effectiveness and the rule of law. The research has significant policy implications to the emerging Asian economies since there is need to ensure that institutional structures are intensified to attract and maintain investment in unstable economies.