O17 - Formal and Informal Sectors; Shadow Economy; Institutional ArrangementsReturn

While theoretical perspectives often emphasize the role of high-quality institutions in attracting foreign investors, empirical findings remain rather mixed. This study advances existing research by exploring the interplay between quality of institutions and economic development in driving greenfield foreign direct investment (FDI) in European countries. The results do not suggest that better institutions alone directly help attract FDI in the selected European sample from 2003-2022. However, in more economically developed host countries, institutional quality plays a significant role, whether measured by real GDP per capita or GNI per capita. Further analysis reveals that both legal and political components of institutional quality have a beneficial conditional effect in more developed countries. Conversely, this finding does not hold uniformly across all FDI; it applies to FDI in the services sector but not in manufacturing, which may be explained by efficiency-seeking motives.

We estimate that the Unobserved Economy (UnEc) share in Portuguese GDP rose to a maximum of 34.37% in 2022. The results suggest that cutting the tax burden and improving the efficacity of social benefits could reduce UnEc and foster inclusive growth. The rising UnEc share MIMIC estimates found in our single-country study, with variables suited to Portugal, contrast with the downward trend (from 22.2% in 2003 to 16.5% in 2021) in the MIMIC multi-country study by Schneider (2021), who uses different variables - mostly reflecting the economic structure of advanced economies - and does not report if and how country heterogeneity is dealt with. Compared to other recent single-country estimates for the European Union periphery, Schneider (2021) also underreports the UnEc share of (at least) Greece, Poland and Lithuania. Thus, we recommend that authorities prefer UnEc single-country estimates in their analysis and policy design and be aware of mentioned issues in multi-country results.