Institutional quality, institutional distance and international trade: evidence from 33 trading partners of India using PPML, Heckman selection, and GMM methods

Purpose This paper aims to examine the impact of absolute and relative institutional quality on India’s bilateral trade with its 33 trading partners from 1996 to 2022. Design/methodology/approach The Poisson Pseudo maximum likelihood estimator, Heckman selection procedure and the System Generalized Method of Moments models are estimated in this study. Findings Based on governance indicators incorporated in an augmented gravity model, we found that a better (worse) institutional quality in the importing country and a positive (negative) institutional difference in favour (against) of the destination market bolsters (constraints) the trade flows. We also validated Linder’s hypothesis, but no evidence for “distance is dead” is reported. In addition, trade creation in the case of AFTA and trade diversion in the case of SAFTA are found. The outcome is robust across different methodologies. Practical implications On a comparative note, our results advocate the promotion of quality institutions with an emphasis on the several dimensions of governance to promote trade flows among the partner countries. Originality/value Our study will enrich the existing literature with the following dimensions. Firstly, we do not rely on a single definition or dimension of institutions but rather incorporate a comprehensive set of World Governance indicators from the World Bank dataset. Secondly, we analyse the effect of institutions on the bilateral trade flows at levels (l) at the destination market j and the difference (d) in the institutional quality between importer and exporter countries, j and i. Third, to ensure the precision and robustness of results, we applied several econometric methodologies.