Institutional quality and firms' productivity in European regions

We investigate the relationship between regional institutional quality and firms’ productivity over the 2010-2014 period, by regressing a measure of TFP for European manufacturing SMEs on a region-level index of institutional quality and its components, rule of law and government effectiveness. We find strong evidence that better local institutions help SMEs to become more productive. Besides, the impact of institutions comes out to interplay with some firms’ characteristics such as size, age, hu-man capital and productivity level, as well as the firms’ operating sector. These findings have im-portant implications for the definition of suitable strategies to foster economic growth in EU regions.