Threshold effects of institutional quality on economic growth in China’s leading provinces

Abstract

This study investigates how institutional quality influences the linkage between economic growth and factor inputs specifically physical capital, labor, human capital, and R&D within China’s leading provinces. Drawing on annual panel data from 1996 to 2022 for Guangdong, Jiangsu, Shandong, Zhejiang, Henan, and Sichuan, a panel threshold modeling approach is employed to identify non-linear effects of institutional quality on the relationship between factor inputs and growth. A robustness check is conducted to validate the findings. The empirical results suggest that economic growth benefits from factor inputs only when institutional quality surpasses a critical threshold. This study provides empirical evidence that institutional quality mediates the effectiveness of factor inputs in driving economic growth. While physical capital, labor, and human capital remain influential across different institutional settings, R&D contributes significantly only above a certain institutional threshold. Policymakers should prioritize strengthening institutional frameworks to optimize the productivity of investments in physical capital, labor, human capital, and R&D.