Institutional quality and firms' productivity in European regions

The relationship between regional institutional quality and firms' productivity in the period 2010-14 is investigated by regressing a measure of total factor productivity for European manufacturing small and medium-sized enterprises on a regional level index of institutional quality and its components, the rule of law and government effectiveness. Strong evidence is found that better local institutions help small and medium-sized enterprises become more productive. In addition, the impact of institutions interplays with some firm characteristics, such as firms' size, age, human capital and productivity level, as well as firms' operating sector. These findings have important implications for the definition of suitable strategies to foster economic growth in the European regions.