Causality Relationship between Institutional Structure Indicators, Export and Foreign Direct Investments: the Case of Commonwealth of Independent States

In this study, it is aimed to investigate the causal relationships between institutional structure indicators, exports and foreign direct investment in Commonwealth of Independent States countries. The reason for the selection of this country group is that these countries implement policies within the framework of structural transformation after leaving the Union of Soviet Socialist Republics. In the present study covering the period 2000-2017; the share of exports in GDP, the share of net foreign direct capital inflows in GDP, the government efficiency index, the political stability index and the rule of law index were chosen as variables. As a result of the study in which Dumitrescu-Hurlin causality analysis was applied; a one-way causal relationship from the rule of law to the share of exports in GDP and to political stability was found. Meanwhile, one-way causal relationships from the government effectiveness index to export share in GDP and to share of foreign direct investment inflows in GDP were found. Summary In recent years, greater importance has been attached to the relationship between institutional structure and national/international economic activities. There have been a growing number of empirical studies that show an increase in the indicators which measure institutional structure. These studies examine the effects of institutional structure on various economic indicators for different country groups within particular periods. Findings from the empirical studies have revealed an important relationship between institutional structure and economic activities. In this study, the causal relationship among some institutional indicators, the share of exported goods and services and foreign direct investments to Gross Domestic Product (GDP) which are the indicators of a country’s level of integration in the global economy was analyzed. The share of exported goods and services in GDP indicates the capability of a country to integrate with the global economy. The share of net inflow of foreign direct investments in GDP is also an important indicator for an economy since it captures the power of that economy to attract the attention of global investors. Both of these indicators clearly contribute to the GDP of a country. Export and foreign direct investment share in GDP are also measurements of a country’s integration with the global economy. When it comes to institutional structure, there are some relevant indicators that have been released by the World Bank. An analysis of the impact of these institutional indicators on an economy has become a vibrant topic in the field of economics. The indicators used in this study were political stability, government effectiveness and the rule of law. The main idea of this study was to analyze whether institutional factors have an impact on the overall economic performance of particular countries. Causality analysis was used on these variables in order to reach some relevant conclusions to this research question. Countries from the Commonwealth of Independent States were selected to analyze this causal relationship. Since they became independent after the disintegration of the Soviet Union, both economic and institutional transformations were vital for them to make progress in terms of development. All the variables used in the study were obtained from the World Bank database. The export indicator was used in logarithmic form. However, the other variables could not be used in logarithmic form since they have negative values. The Dumitrescu-Hurlin causality test which can be applied in the case of both having and not having cross-section dependence was used in this study. The Dumitrescu-Hurlin causality analysis tests the null hypothesis representing no causal relationship for each cross-section against the alternative hypothesis representing causal relationship for some cross-section units. The series is required to be stationary in order to apply the Dumitrescu-Hurlin causality test. For that reason, the cross-section dependence of the series was detected first, and then unit root tests were applied depending on the results of the cross-section dependence test. After detecting the integration level of the series, all series with unit root were transformed into a stationary series by differentiating. After that, cross section dependence of the residuals that belong to the models representing causal relationships was analyzed in order to decide on whether to apply a first-generation or second-generation causality test. Results of the study revealed that there is indeed a causal relationship from government effectiveness and from rule of law to export share in GDP. There is also a one-way causal relationship from government effectiveness to foreign direct investments share in GDP. A causal relationship among institutional indicators themselves were also analyzed. According to these results, there is a one-way causal relationship from rule of law to political stability. By considering these outcomes, it can be summarized that institutional factors have a fundamental impact on the level of openness to the global economy with respect to the Commonwealth of Independent States’ countries. Rule of law as an indicator which reflects the confidence of the applicability of law and respect to property rights has a measurable impact on the share of exported goods and services in GDP. Furthermore, government effectiveness as an institutional indicator, which reflects the trust in government to implement the stated policy successfully, is a cause of export share in GDP and foreign direct investment in GDP. Briefly, trust in government policies in the countries from the Commonwealth of Independent States is a direct cause of integration into the global economy. It is also important to realize the interconnectedness of these institutional indicators. Results of the analysis indicate that a causal relationship exists among these institutional factors. As a re