Abstract
This paper argues that institutional quality has both direct and indirect (moderating) effects on productivity of countries. These hypotheses are tested using a battery of institutional proxies (governance, economic freedom, intellectual property rights and ease of doing business) and two channels for technological spillovers (trade and FDI) in a panel of developed and transition economies. The results confirm that good institutions have positive and comparable direct effects on productivity across the board. However, they moderate differently the relationship between foreign technological spillovers and productivity. Thus, governance, IPR and economic freedom exhibit negative moderation in the case of transition economies, while easiness of doing business moderates positively this relationship for both groups of countries. Further, the moderation effects are larger for transition economies and for trade-related spillovers. Overall, these results suggest a trade-off for transition countries between pursuing institutional upgrades and enjoying greater gains from technological spillovers.
•This paper argues that institutions affect productivity directly and indirectly.•It tests these hypotheses using a battery of institutional indicators and countries.•Good institutions have robust and positive direct effects on productivity.•Institutions moderate the effect of spillovers contingent on country specifics.•These effects are negative and more prevalent for trade and transition economies.