What determines firm investments? An empirical investigation on the role of local institutional quality, industry regulation and state ownership

The influence of the environment on firms’ investments has been largely investigated. Literature underlines that the national institutional quality is one of the key driver of firms’ investment strategies. It is instead, relatively unexplored, if local institutional quality may affect firms’ investments, that is if difference in institutional quality within the same country may influence firm investments. To this purpose, we collected data about a large sample of limited companies in Italy, a country characterized by significant variation of institutional quality within it. Our results show that higher local institutional quality positively influences firms’ total investments. Moreover, our results highlight that regulated industry and state- ownership moderate this relationship. In particular, we find that, when local institutional quality decreases, regulated and state-owned firms invest more than non-regulated and non- state-owned firms; the opposite is true when local institutional quality increases. These findings underline the importance of local institutional quality and the heterogeneous reaction of regulated and state-owned firms to changes in the institutional environment.