Document Type : Research Paper

Authors

• Somayeh Nematollahi ¹
• Farshad Momeni ²
• Alireza Garshasbi ³

¹ Ph.D. Candidate in Economics, Allameh Tabataba’i University, Tehran, Iran

² Professor, Department of Economic Planning and Development, Allameh Tabataba’i University, Tehran, Iran

³ Associate Professor, Institute of Business Studies and Research, Tehran, Iran

Abstract

The present study aimed to examine the effect of regulatory levels on industrial value-added growth, comparing the results between developed and developing countries. For this purpose, a nonlinear equation was estimated using the panel GMM method and the delta method for the period 2000–2019. The estimation results for a sample of 99 countries showed an inverted U-shaped relationship between regulatory variables and industrial growth. For approximately 67% of the observations, the regulatory level had increased, and its effect on industrial growth was positive and significant. In addition, the growth-maximizing regulatory level in the sample was estimated at 2.61 (on a scale of 0–10). Moreover, the findings made clear that the relationship between regulation and industrial growth in developed countries was fundamentally different from that in developing countries. Specifically, while the estimates for developing countries were consistent with those for the full sample and exhibited an inverted U-shaped pattern, no growth-maximizing regulatory level was observed for developed countries, which can be attributed to institutional differences between the two groups.

Introduction

A main area of government intervention in the economy is the regulation aimed at promoting industrial development. The growing share of industry in the gross domestic product of industrializing countries highlights its special position in the world economy. Given the importance of government intervention and its capacity to play a regulatory role, a key question arises: to what extent have government regulatory institutions facilitated the process of industrialization, and to what extent have they created additional complexities for the industrial sector? Have the regulatory tools designed to support industrial policy contributed to industrial development, or have they instead led to industrial decline? Since government regulation has varying effects across countries, the present research is based on the hypothesis that an efficient level of regulation has a positive effect on industrial growth.

Materials and Methods

Relying on the data from multiple countries, the empirical model used in this study was to examine the relationship between regulation and industrial growth, as presented in Equation (1):
Growthi,t = 𝛼 + 𝛽1Regi,t + 𝛽2Reg2i,t + 𝛾Xi,t + 𝛼i + 𝜃t + 𝜀i,t           (1)
In Equation (1), Growthi,t represents the annual industrial growth rate, which is also used in the Industrial Competitiveness Index and thus reflects aspects of industrial development quality. Reg denotes the level of regulation, X is a matrix of control variables, and 𝜃 is the fixed effects. Moreover, i represents countries and t refers to time periods (2000–2019). Regarding the variables, international data from reputable institutions was selected to enable meaningful cross-country comparisons. Concerning the indicators, industrial value-added growth was taken from the UNIDO database. The regulation variable was derived from the Fraser Institute’s Economic Freedom Index, specifically from its subcomponents on credit market, labor market, and business (commercial) regulation. The Fraser dataset is the most widely used and internationally recognized measure of regulatory conditions. The Fraser Institute provides scores for more than 150 countries on a scale of 0 to 10, where higher values indicate less regulation. In the current study, the scale was reversed so that higher scores would reflect higher levels of regulation. Concerning the control variables, the economic freedom variable from the Fraser Institute and industrial value added per capita from UNIDO were employed. To test the hypothesis, the indicators were introduced and the maximum level of regulation was estimated through the Delta method. The baseline specification of the model was then estimated using the GMM approach in a dynamic panel structure, covering 99 countries over the period 2000–2019.

Results and Discussion

According to the results, increasing the level of regulation generally had a positive effect on the growth rate of industrial value added. The findings indicated that regulation exerted a positive impact on industrial growth at lower levels, but its effect became negative at higher levels. In other words, maximum industrial growth occurred when regulation was relatively low, and increases in regulation up to the growth-maximizing point could have positive and significant effects on industrial value-added growth. However, once regulation exceeded the growth-maximizing level, its influence became negative. This highlights the importance of identifying the appropriate degree of regulation for guiding government intervention in the economy. The results also underscored the dual nature of regulation. Its effect on industrial value-added growth is not linear; rather, it follows a nonlinear pattern in which both positive and negative effects are possible—depending on the level of regulation. Thus, the expectation that government regulation will have a uniform effect across different contexts is unrealistic. Moreover, the findings reveal that the relationship between regulation and industrial growth differs between developing and developed countries. Thus, the expectation that government regulation will have a uniform effect across different contexts is unrealistic. Moreover, the findings revealed that the relationship between regulation and industrial growth differs between developing and developed countries. The inverted U-shaped relationship between regulation and industrial value-added growth suggests that discussions on regulatory reform require greater attention. A country with excessive regulation that seeks to enhance industrial growth should consider continuing regulatory reforms, but only to the extent that such reforms do not reduce growth relative to its current value.

Conclusion

The results showed that the relationship between regulation and industrial value-added growth in developed countries differs fundamentally from that in developing countries. Specifically, while the findings for developing countries aligned with the results obtained from the full sample, the results for developed countries diverged significantly. In developed economies, the overall effect of regulation on industrial value-added growth is negative. This contrast can be attributed to differences in government capacity and the quality of market institutions. In countries with weaker institutions and lower administrative capacity, introducing certain regulatory mechanisms may actually be beneficial and can substitute for other missing capacities—a point emphasized by Mancur Olson in the theory of the market-augmenting government. It is also important to note that an over-regulated economy that attempts aggressive deregulation may encounter resistance from those who benefit from existing regulations and wish to preserve current rents. Therefore, the impact of regulation on industrial growth depends not only on the level of regulation itself but also on the extent of rent-seeking activity. When rent-seeking is pervasive, the diversion of resources away from productive activities in response to proposed regulatory changes reduces the likelihood that such reforms will successfully promote industrial growth.
 

Keywords

• Regulation
• Industrial Policy
• Industrial Growth
• Developed and Developing Countries

Main Subjects

• Political economy