Institutional Quality and Sustainable Firm Growth: Evidence from North African Countries

Abstract

This study investigates the relationship between institutional quality (IQ) and sustainable firm growth (SFG) in North African countries, focusing on Egypt, Morocco, and Tunisia. Utilizing panel data from 155 non-financial firms over the period 2007–2020, we employ a system generalized method of moments (GMM) approach to analyze this relationship. Our findings reveal a significant U-shaped relationship between IQ and SFG, indicating that both very low and very high levels of IQ are associated with limited firm growth, while an optimal level of IQ promotes substantial growth. This suggests that firms in low-IQ environments struggle due to weak regulatory frameworks and corruption, whereas those in high-IQ environments benefit from better governance and transparency, leading to enhanced growth. The study makes several contributions by providing empirical evidence from an underexplored region, highlighting the complex dynamics between institutional quality and firm growth, and offering robust methodological insights. Policy implications underscore the need for balanced regulation and long-term investment in institutional quality, education, and infrastructure.