The effect of institutions on R&D investment: the case of four mediterranean euro area states

Purpose - This study investigates the impact of institutional factors on firms investing in R&D. Design/methodology/approach - The study uses data from the World Bank's Enterprise Surveys for the Republic of Cyprus, Greece, Italy and Portugal. A model with institutional factors as explanatory variables and firm performance factors as control variables is estimated with weighted least squares heteroscedasticity corrected regression. The reverse causality problem is addressed by using a two-stage least squares regression approach. Findings - The findings indicate that institutional quality has a significant influence on firms' R&D expenditure. The results have several implications in relation to findings of previous research. Research limitations/implications - The inclusion of more countries that were affected by the European economic crisis will probably give more insights about the effect of institutional factors on R&D. Practical implications - Policy makers have to address short-comings in institutional quality, particularly in terms of the labor regulation burden. Policy makers should prioritize anti-corruption measures to foster an environment that would attract more R&D in the Republic of Cyprus and Greece. Originality/value - This study contributes to the growing body of literature investigating the impact of institutional factors on R&D. It focuses on four developed European countries that bore the brunt of the European economic crisis and have to implement their recovery and resilience plans successfully, in order to recover from the effects of the COVID-19 pandemic on their economic activity.