Governance Environment and the Public Investment – Private Investment Relationship

Abstract

The study empirically investigates the role of the governance environment in the public investment – private investment relationship for a sample of 72 developing countries with bad governance environment and for a sample of 25 developed countries with good one over the period 2003 – 2016. The paper first develops an analytical framework to formulate empirical equations, then uses the difference GMM Arellano-Bond estimators for estimation and the FE-IV estimator for robustness check. More interestingly are the empirical findings. First, the public investment – private investment relationship strongly varies based on the quality of governance environment. Second, the governance environment strongly promotes private investment. These findings suggest some important policy implications in setting up the sound governance environment
for the public investment – private investment relationship to governments in countries worldwide.