Institutional Barriers of Private Investment in Developing Countries

Governance institutions are part of the investment climate of a country. Good governance institutions are viewed as reducing economic uncertainties and as promoting efficiency. This paper empirically shows that the quality of governance is an essential determinant of the private investment decisions in the developing countries by stressing the existence of different types of possible measures of governance. We use three different indicators to measure the quality of governance, Quality of Administration, Political Accountability and Political Stability. Indicators were proved to be significantly –although at different levels of significance and magnitudes of influence- contributing for private investment decisions. In particular the low level of political accountability has been an influential factor which has been holding back the region from reaching its private investment potential. Findings are robust to the introduction of other explanatory variables: structural reforms – in the form of trade openness and financial development- and human capital in particular.