Abstract

A large body of literature has recognised to institutions an important role in determining the ability of a region to capture development opportunities, in a variety of different ways, even favouring the growth of local firms’ productivity. We investigate the effect of local institutional quality on Total Factor Productivity growth and its components, i.e. improvement in internal efficiency, technological advancement in the firm’s production process, and change in operational scale. In a sample of 27,181 Italian manufacturing sme s, we find that institutions affect firms’ efficiency mainly through its influence on pure efficiency and, to a lesser extent, on technological change. Regulation turns out to be the most important institutional dimension in favouring productivity growth, while the crises of 2008-09 and 2011-12 weaken the relevance of institutional quality. Our results are robust across a number of different specifications and estimation methods.