Impact of institutional uncertainty on private investment

Abstract

The study undertakes an empirical investigation to explore institutional uncertainty-private investment linkages in select East and South Asian countries, namely, Bangladesh, India, Pakistan, Sri Lanka, Indonesia, Republic of Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Within an analytical framework based on emerging option theory of investment, the study provides further empirical support to the impact of institutional uncertainty on private investment, using panel data over a period of 1982-95. The findings of the study suggest that gdp growth rate, availability of credit and complementary investment in the previous year- all have positive impact on private investment. On the other hand, government consumption and exchange rate fluctuation are negatively associated with private investment flow. Concurrently, enhanced bureaucratic quality and security to property rights are positively associated with investment performance, while lack of rule of law is found to deter investment stream. As such, the study suggests to improve the quality of institutions in South Asia, notably the quality of property rights and the quality of overall governance to promote private investment in the region.