The Influence of Institutions on Investment Demand: Cross-Country Analysis

Abstract The article analyzes the mechanism by which the quality of economic institutions influences the dynamics of investment demand using a large sample of countries. Using dynamic panel data for 161 countries from 2002 to 2022, it was shown that the sensitivity of investment demand to the interest rate is a function of the quality of institutions (the Rule of Law and Regulatory Quality indicators). In other words, the elasticity of investment to the interest rate decreases under conditions of low institutional quality and increases under conditions of high institutional development. In conditions of an insufficiently developed institutional environment, economic agents tend to postpone investment decisions for a longer period until they receive additional information and reduce uncertainty, even in conditions of low interest rates in the economy. The findings obtained are of practical interest, since they substantiate the importance of searching for alternative approaches to the formation of investment conditions in the context of low-quality institutions in the country, and also allow for a better understanding of the mechanism by which institutional conditions influence investment demand.