Institutional Quality and Shadow Economy: An Investment Potential Evaluation Model

Abstract

The article summarizes some arguments as regards the scientific challenge on improving approaches to evaluating the country’s investment potential. The main objective of the research is to identify the features and perspectives of applying the variables such as the shadow economy and the integrated institutional quality index into a model evaluating the country’s investment potential. To solve this task, systematization of the related theoretical and methodological materials has been done. The methodological tools of the research are carried out in the following logical sequence: systematization of existing statistical methods for estimating the shadow economy; time data series analysis; and regression analysis. The scope of the shadow economy could be estimated as a dependent variable, with both its determinants and indicators detected and measured. The macro methods, such as Multiple Indicators Multiple Causes (MIMIC) are suitable approaches from an econometric standpoint to evaluate the shadow economy. Institutional quality is crucially an important variable for empirical studies related to evaluating the country’s investment potential. The proposed approach considers significance and direction of the six Worldwide Government Indicators’ (WGI) impact on foreign direct investment net inflow, eliminating the issue of their multicollinearity. However, political instability and high frequency of foreign and domestic policy changes during the last decades distort statistical significance of the results obtained. FDI inflow, as well as the quality of governance, and the shadow economy, is influenced by many other factors, both internal and external, so to build a qualitative model for evaluating the country’s investment potential of the national economy it is necessary to expand the set of factors for analysis. The results of the research can be useful for a more accurate investment potential evaluation on the macroeconomic level, and forecasting foreign direct investment inflows for the following time periods.