Institutional Difference Between Countries And Its Causes

The phrase “institutions matter “emerged in new institutional economics since20c90 s,it is represented by famous economist such as North Douglas.C and proliferated by a body of literature demonstrating that institutions matter significantly for economic progress.Moreover,it is the non-ignorable factor which causes the huge economic growth level gap between countries from the aspect of macroeconomics.However, the bilateral international trade flow or the choices of MNS can also be affected by the institutional arrangements in terms of microeconomics.Therefore, the research of cross-nation institutional differences can be very profound. We first analyze the function of institution in governing “state plunder and private plunder”,and then measuring the institution arrangements of a specific country by constructing its institution index system comprehensively. After comparing the advantages and disadvantages of several distance calculation methods, we choose the Mahanalobis distance method to measure the institution distance of 60 countries utilizing Matlab software. Having conducted all these preliminary work, this paper attempts to investigate the possible causes of institutional differences by examining different influencing factors(economic growth level,history origin and geographic distance).The estimation results are as follows: the institutional difference is bigger when there is larger economic growth level gap among countries; the more adjacent geographically of two countries, the less difference of institutional distance exists; if the legal and colonial origin are the same between two countries, their institutional arrangements tend to be extremely similar.However,those factors are competitors to each other: as an important communication carrier of the world, geographic distance plays the primary role in shaping cross-nation institutional difference; economic growth level gap can significantly affect institutional difference, legal and colonial origin has the smallest effects compared to geographic distance and economic growth level gap. Nevertheless, due to the reversal causality relationship between institution distance and economic growth level, it is a necessity to utilize instrumental variable and the econometric method of 2SLS so as to guarantee the unbiased empirical results.Thus, it is undeniable that we have to re-examine the relationship between economic growth and institutional differences and the effects of other factors on institution distance. This article offers a brand-new perspective to understand institutionaldifferences between countries and can be enlightening to Chinese institutional reform and innovation under new circumstances.