Institutional Quality and Shadow Economy: An Investment Potential Evaluation Model




country investment potential; foreign direct investment; shadow economy; national economy, institutional quality


The article summarizes some arguments as regards the scientific challenge on improving approaches to evaluating the country’s investment potential. The main objective of the research is to identify the features and perspectives of applying the variables such as the shadow economy and the integrated institutional quality index into a model evaluating the country’s investment potential. To solve this task, systematization of the related theoretical and methodological materials has been done. The methodological tools of the research are carried out in the following logical sequence: systematization of existing statistical methods for estimating the shadow economy; time data series analysis; and regression analysis. The scope of the shadow economy could be estimated as a dependent variable, with both its determinants and indicators detected and measured. The macro methods, such as Multiple Indicators Multiple Causes (MIMIC) are suitable approaches from an econometric standpoint to evaluate the shadow economy. Institutional quality is crucially an important variable for empirical studies related to evaluating the country’s investment potential. The proposed approach considers significance and direction of the six Worldwide Government Indicators’ (WGI) impact on foreign direct investment net inflow, eliminating the issue of their multicollinearity. However, political instability and high frequency of foreign and domestic policy changes during the last decades distort statistical significance of the results obtained. FDI inflow, as well as the quality of governance, and the shadow economy, is influenced by many other factors, both internal and external, so to build a qualitative model for evaluating the country’s investment potential of the national economy it is necessary to expand the set of factors for analysis. The results of the research can be useful for a more accurate investment potential evaluation on the macroeconomic level, and forecasting foreign direct investment inflows for the following time periods.


Download data is not yet available.


Agnihotri, An., & Arora, Sh. (2019). Study of Linkages between Outward Foreign Direct Investment (OFDI) and Domestic Economic Growth: an Indian Perspective. Financial Markets, Institutions and Risks, 3(1), 43-49.

Ali, M., & Bohara, A. K. (2017). How Does FDI Respond to the Size of Shadow Economy: An Empirical Analysis under a Gravity Model Setting? International Economic Journal, 31(2), 159-178.

Alm, J., & Embaye, A. (2013). Using dynamic panel methods to estimate shadow economies around the world, 1984–2006. Public Finance Review, 41(5), 510–543.

Asfuroglu, D., & Elgin C. (2016). Growth efects of infation under the presence of informality. Bulletin of Economic Research, 68(4), 311–328

Bilan, Y., Raišienė, A., Vasilyeva, T., Lyulyov, O., & Pimonenko, T. (2019). Public Governance efficiency and macroeconomic stability: examining convergence of social and political determinants. Public Policy and Administration, 18(2), 241–255.

Bogachov, S., Kwilinski, A., Miethlich, B., Bartosova, V., Gurnak, A. (2020). Artificial Intelligence Components and Fuzzy Regulators in Entrepreneurship Development. Entrepreneurship and Sustainability Issues, 8(2), 487-499.

Boiko, V., Kwilinski, A., Misiuk, M., & Boiko, L. (2019). Competitive Advantages of Wholesale Markets of Agricultural Products as a Type of Entrepreneurial Activity: The Experience of Ukraine and Poland. Economic Annals-XXI, 175(1-2), 68-72.

Chen C. (1981). The EM Approach to the Multiple Indicators and Multiple Causes Model via the Estimation of the Latent Variable. Journal of American Statistical Association, 76, 704–708.

Chygryn, O., Bilan, Y., & Kwilinski, A. (2020). Stakeholders of Green Competitiveness: Innovative Approaches for Creating Communicative System. Marketing and Management of Innovations, 3, 356-368.

Cicek, D., & Elgin, C. (2011). Cyclicality of fscal policy and the shadow economy. Empirical Economics, 413, 725–737.

Czyżewski, B., Matuszczak, A., & Miskiewicz, R. (2019). Public Goods Versus the Farm Price-Cost Squeeze: Shaping the Sustainability of the EU’s Common Agricultural Policy. Technological and Economic Development of Economy, 25(1), 82-102.

D’Erasmo, P., & Boedo, H. (2012). Financial structure, informality and development. Journal of Monetary Economics, 59(3), 286–302.

Dabla-Norris, E., Gradstein, M., & Inchauste, G. (2008). What causes firms to hide output? The determinants of informality. Journal of development Economics, 85(1), 1–27

Dalevska, N., Khobta, V., Kwilinski, A., & Kravchenko, S. (2019). A Model for Estimating Social and Economic Indicators of Sustainable Development. Entrepreneurship and Sustainability Issues, 6(4), 1839-1860.

Dell'Anno, R., Gómez, M., & Pardo, A. (2007). The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach. Empirical Economics, 33(1), 51-84.

Dementyev, V.V., & Kwilinski, A. (2020). Institutsionalnaya sostavlyayuschaya izderzhek proizvodstva [Institutional Component of Production Costs]. Journal of Institutional Studies, 12(1), 100-116.

Drozdz, W., Miskiewicz, R., Pokrzywniak, J., & Elzanowski, F. (2019). Urban Electromobility in the Context of Industry 4.0. Torun: Wydawnictwo Adam Marszalek.

Drozdz, W., Marszalek-Kawa, J., Miskiewicz, R., & Szczepanska-Waszczyna, K. (2020). Digital Economy in the Comporary World. Torun: Wydawnictwo Adam Marszalek.

Dzwigol, H. (2019a). The Concept of the System Approach of the Enterprise Restructuring Process. Virtual Economics, 2(4), 46-70.

Dzwigol, H. (2019b). Research Methods and Techniques in New Management Trends: Research Results. Virtual Economics, 2(1), 31-48.

Dzwigol, H. (2020a). Innovation in Marketing Research: Quantitative and Qualitative Analysis. Marketing and Management of Innovations, 1, 128-135.

Dzwigol, H. (2020b). Methodological and Empirical Platform of Triangulation in Strategic Management. Academy of Strategic Management Journal, 19(4), 1-8.

Dźwigoł, H. (2020c). Interim Management as a New Approach to the Company Management. Review of Business and Economics Studies, 8(1), 20-26.

Dzwigol, H., & Wolniak, R. (2018). Controlling w procesie zarządzania chemicznym przedsiębiorstwem produkcyjnym [Controlling in the management process of a chemical industry production company]. Przemysl Chemiczny, 97(7), 1114—1116.

Dzwigol, H., & Dźwigoł-Barosz, M. (2018). Scientific Research Methodology in Management Sciences. Financial and Credit Activity: Problems of Theory and Practice, 2(25), 424-437.

Dzwigol, H., & Dzwigol-Barosz, M. (2020). Sustainable Development of the Company on the Basis of Expert Assessment of the Investment Strategy. Academy of Strategic Management Journal, 19(5), 1-7.

Dzwigol, H., Shcherbak, S., Semikina, M., Vinichenko, O., & Vasiuta, V. (2019a). Formation of Strategic Change Management System at an Enterprise. Academy of Strategic Management Journal, 18(SI1), 1-8.

Dzwigol, H., Aleinikova, O., Umanska, Y., Shmygol, N., & Pushak, Y. (2019b). An Entrepreneurship Model for Assessing the Investment Attractiveness of Regions. Journal of Entrepreneurship Education, 22(1S), 1-7.

Dzwigoł, H., Dzwigoł–Barosz, M., Zhyvko, Z., Miskiewicz, R., & Pushak, H. (2019c). Evaluation of the Energy Security as a Component of National Security of the Country. Journal of Security and Sustainability Issues, 8(3), 307-317.

Dzwigol, H., Dźwigoł–Barosz, M., & Kwilinski, A. (2020d). Formation of Global Competitive Enterprise Environment Based on Industry 4.0 Concept. International Journal of Entrepreneurship, 24(1), 1-5.

Dzwigol, H., Dzwigol-Barosz, M., Miskiewicz, R., & Kwilinski, A. (2020). Manager Competency Assessment Model in the Conditions of Industry 4.0. Entrepreneurship and Sustainability Issues, 7(4), 2630-2644.

Elgin, C. (2019). Shadow Economies Around the World: Evidence from Metropolitan Areas. Eastern Economic Journal.

Frey, B.S., & Weck-Hanneman, H. (1984). The hidden economy as an ‘unobserved’ variable. European Economic Review, 26(1–2), 33-53.

Furmaniak, S., Gauden, P.A., Patrykiejew, A., Miśkiewicz, R., & Kowalczyk, P. (2018). Carbon Nanohorns as Reaction Nanochambers – a Systematic Monte Carlo Study. Scientific Reports, 15407.

Furmaniak, S., Gauden, P.A., Patrykiejew, A., Miskiewicz, R., & Kowalczyk, P. (2019a). The Effects of Confinement in Pores Built of Folded Graphene Sheets on the Equilibrium of Nitrogen Monoxide Dimerisation Reaction. Journal of Physics Condensed Matter, 31(13), 135001, 1-12.

Furmaniak, S., Gauden, P.A., Patrykiejew, A., Szymański, G., Miśkiewicz, R., & Kowalczyk, P. (2019b). In Silico Study on the Effects of Carbonyl Groups on Chemical Equilibrium of Reactions with a Polar Product Occurring under Confinement in Pores of Activated Carbons. Chemical Engineering Communications, 1-12.

Globerman, S., & Shapiro, D. (2003). Global foreign direct investment flows: the role of governance infrastructure. World Development, 30, 1899–1919.

Goel, R. K., Ram, R., Schneider, F., & Potempa, A. (2019). International movements of money and men: impact on the informal economy. Journal of Economics and Finance, 44, 179–197.

Huynh, C. M., Nguyen, V. H. T., Nguyen, H. B., & Nguyen, P. C. (2019). One-way effect or multiple-way causality: foreign direct investment, institutional quality and shadow economy? International Economics and Economic Policy, 17, 219–239.

Jöreskog, K. G., & Goldberger, A. S. (1975). Estimation of a Model with Multiple Indicators and Multiple Causes of a Single Latent Variable. Journal of the American Statistical Association, 70(351a), 631–639.

Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The Worldwide Governance Indicators: Methodology and Analytical Issues. Hague Journal on the Rule of Law, 3(02), 220–246.

Kondratenko, V., Okopnyk, O., Ziganto, L., & Kwilinski, A. (2020). Innovation Development of Public Administration: Management and Legislation Features. Marketing and Management of Innovations, 1, 87-94.

Kharazishvili, Y., Kwilinski, A., Grishnova, O., & Dzwigol, H. (2020). Social Safety of Society for Developing Countries to Meet Sustainable Development Standards: Indicators, Level, Strategic Benchmarks (with Calculations Based on the Case Study of Ukraine). Sustainability, 12(21), 8953.

Kuzior, A., Kwilinski, A., & Tkachenko, V. (2019). Sustainable Development of Organizations Based on the Combinatorial Model of Artificial Intelligence. Entrepreneurship and Sustainability, 7(2), 1353-1376.

Kwilinski, A. (2017). Development of Industrial Enterprise in the Conditions of Formation of Information Economics. Thai Science Review, Autumn 2017, 85-90.

Kwilinski, A. (2018a). Mechanism of Formation of Industrial Enterprise Development Strategy in the Information Economy. Virtual Economics, 1(1), 7-25.

Кwilinski, A. (2018b). Mechanism of Modernization of Industrial Sphere of Industrial Enterprise in Accordance with Requirements of the Information Economy. Marketing and Management of Innovations, 4, 116-128.

Kwilinski, A. (2018c). Mechanism for Assessing the Competitiveness of an Industrial Enterprise in the Information Economy. Research Papers in Economics and Finance, 3(1), 7-16.

Kwilinski, A. (2018d). Trends of Development of the Information Economy of Ukraine in the Context of Ensuring the Communicative Component of Industrial Enterprises. Economics and Management, 1(77), 64-70.

Кwilinski, A. (2019). Implementation of Blockchain Technology in Accounting Sphere. Academy of Accounting and Financial Studies Journal, 23(SI2), 1-6.

Kwilinski, A., Tkachenko, V., & Kuzior, A. (2019a). Transparent Cognitive Technologies to Ensure Sustainable Society Development. Journal of Security and Sustainability Issues, 9(2), 561-570

Kwilinski, A., Drobyazko, S., & Derevyanko, B. (2019b). Synergetic and Value Effects in Corporate Mergers and Acquisitions of International Companies. In Khalid S. Soliman (Ed.), Proceedings of the 34th International Business Information Management Association Conference (IBIMA) 13-14 November 2019. Vision 2025: Education Excellence and Management of Innovations through Sustainable Economic Competitive Advantage in 2019 (pp. 9467-9471). Madrid, Spain: IBIMA Publishing.

Kwilinski, A., Dalevska, N., Kravchenko, S., Hroznyi, I., Kovalenko, I. (2019c). Formation of the Entrepreneurship Model of E-Business in the Context of the Introduction of Information and Communication Technologies. Journal of Entrepreneurship Education, 22(SI1), 1528-2651-22-S1-337: 1-7.

Kwilinski, A., Ruzhytskyi, I., Patlachuk, V., Patlachuk, O., & Kaminska, B. (2019d). Environmental Taxes as a Condition of Business Responsibility in the Conditions of Sustainable Development. Journal of Legal, Ethical and Regulatory Issues, 22(SI2) 1544-0044-22-SI-2-354: 1-6.

Kwilinski, A., Volynets, R., Berdnik, I., Holovko, M., & Berzin, P. (2019e). E-Commerce: Concept and Legal Regulation in Modern Economic Conditions. Journal of Legal, Ethical and Regulatory Issues, 22(SI2), 1544-0044-22-SI-2-357: 1-6.

Kwilinski, A., Dzwigol, H., & Dementyev, V. (2019f). Transnational Corporations as Entities of International Entrepreneurship. International Journal of Entrepreneurship, 23(SI4), 1-6.

Kwilinski, A., Pajak, K., Halachenko, O., Vasylchak, S., Pushak, Ya., & Kuzior, P. (2019g). Marketing Tools for Improving Enterprise Performance in the Context of Social and Economic Security of the State: Innovative Approaches to Assessment. Marketing and Management of Innovations, 4, 172-181.

Kwilinski, A., & Kuzior, A. (2020). Cognitive Technologies in the Management and Formation of Directions of the Priority Development of Industrial Enterprises. Management Systems in Production Engineering, 28(2), 119-123.

Kwilinski, A., Vyshnevskyi, O., & Dzwigol, H. (2020a). Digitalization of the EU Economies and People at Risk of Poverty or Social Exclusion. Journal of Risk and Financial Management, 13(7), 142.

Kwilinski, A., Zaloznova, Y., Trushkina, N., & Rynkevych, N. (2020b). Organizational and Methodological Support for Ukrainian Coal Enterprises Marketing Activity Improvement. E3S Web of Conferences, 168, 00031.

Kwilinski, A., Dielini, M., Mazuryk, O., Filippov, V., & Kitseliuk, V. (2020c). System Constructs for the Investment Security of a Country. Journal of Security and Sustainability Issues, 10(1), 345-358.

Kwilinski, A., Shteingauz, D., & Maslov, V. (2020). Financial and Credit Instruments for Ensuring Effective Functioning of the Residential Real Estate Market. Financial and Credit Activities: Problems of Theory and Practice, 3(34), 133-140. Retrieved from

Kyrylov, Y., Hranovska, V., Boiko, V., Kwilinski, A., & Boiko, L. (2020). International Tourism Development in the Context of Increasing Globalization Risks: On the Example of Ukraine’s Integration into the Global Tourism Industry. Journal of Risk and Financial Management, 13(12), 303.

Lackó, M. (1996). Hidden economy in East-European countries in international comparison. Luxenburg: International Institute for Applied Systems Analysis (IIASA).

Lakhno, V., Malyukov, V., Bochulia, T., Hipters, Z., Kwilinski, A., & Tomashevska, O. (2018). Model of Managing of the Procedure of Mutual Financial Investing in Information Technologies and Smart City Systems. International Journal of Civil Engineering and Technology, 9(8), 1802-1812.

Lippert, O., & Walker, M. (eds.) (1997): The underground economy: Global evidences of its size and impact. Vancouver, B.C.: The Frazer Institute.

Mathur, A., & Singh, K. (2013). Foreign direct investment, corruption and democracy. Applied Economics, 45(8), 991–1002

Medina, L., & Schneider, F. (2018). Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? IMF Working Papers, 18/17, 1-76. Retrieved from

Miskiewicz, R. (2017a). Knowledge in the Process of Enterprise Acquisition. Progress in Economic Sciences, 4, 415-432.

Miskiewicz, R. (2017b). Knowledge Transfer in Merger and Acquisition Processes in the Metallurgical Industry. Warsaw: PWN.

Miskiewicz, R. (2018). The Importance of Knowledge Transfer on the Energy Market. Polityka Energetyczna, 21(2), 49-62.

Miskiewicz, R. (2019). Challenges Facing Management Practice in the Light of Industry 4.0: The Example of Poland. Virtual Economics, 2(2), 37-47.

Miskiewicz, R. (2020). Internet of Things in Marketing: Bibliometric Analysis. Marketing and Management of Innovations, 3, 371-381.

Miskiewicz, R. (2020a). Efficiency of Electricity Production Technology from Post-Process Gas Heat: Ecological, Economic and Social Benefits. Energies, 13(22), 6106.

Miśkiewicz, R, & Wolniak, R. (2020b). Practical Application of the Industry 4.0 Concept in a Steel Company. Sustainability, 12(14), 5776.

Nair-Reichert, U., & Weinhold, D. (2001). Causality tests for cross-country panels: a new look at FDI and economic growth in developing countries. Oxf Bull Econ Stat, 63(2), 153–171.

Nikopour, H., Habibullah, M., Schneider, F., & Law, S. (2009) Foreign direct investment and shadow economy: a causality analysis using panel data. MPRA paper, 14485.

Oviedo, A. M., Thomas, M. R., & Karakurum-Ozdemir, K. (2009). Economic Informality: Causes, Costs, and Policies - A Literature Survey. World Bank Working Paper, no. 167. Washington, D.C.: World Bank. Retrieved from

Palienko, M., & Lyulyov, O. (2018). The Impact of Social Factors on Macroeconomic Stability: Empirical Evidence for Ukraine and European Union Countries. SocioEconomic Challenges, 2(1), 103-116.

Pająk, K., Kamińska, B., & Kvilinskyi, O. (2016). Modern Trends of Financial Sector Development under the Virtual Regionalization Conditions. Financial and Credit Activity: Problems of Theory and Practice, 2(21), 204-217.

Pająk, K., Kvilinskyi, O., Fasiecka, O., & Miskiewicz, R. (2017). Energy security in regional policy in Wielkopolska region of Poland. Economics and Environment, 2(61), 122-138.

Pimonenko, T., & Lushyk, K. (2017). Zelene investuvannya: dosvid EU dlya Ukrayiny [Green investing: EU experience for Ukraine]. Visnyk Sumsʹkoho derzhavnoho universytetu. seriya Ekonomika. Bulletin of Sumy State University. Economy Ser, 3, 61-67.

Pimonenko, T., Lyulyov, O., Chygryn, O., & Palienko, M. (2018). Environmental Performance Index: relation between social and economic welfare of the countries. Environmental Economics, 9(3), 1-11. doi:10.21511/ee.09(3).2018.01

Posey, C. (2015) Multiple Indicators and Multiple Causes (MIMIC) Models as a Mixed-Modeling Technique: A Tutorial and an Annotated Example. Communications of the Association for Information Systems, Vol. 36 , Article 11. doi: 10.17705/1CAIS.03611.

Prokopenko, O., Chayen, S., Cebula, J., & Pimonenko, T. (2017). Wind energy in Israel, Poland and Ukraine: Features and opportunities. International Journal of Ecology and Development, 32(1), 98-107.

Prokopenko, O., & Miśkiewicz, R. (2020). Perception of "Green Shipping" in the Contemporary Conditions. Entrepreneurship and Sustainability Issues, 8(2), 269-284.

Saługa, P.W., Szczepańska-Woszczyna, K., Miśkiewicz, R., & Chłąd, M. (2020). Cost of Equity of Coal-Fired Power Generation Projects in Poland: Its Importance for the Management of Decision-Making Process. Energies, 13(18), 4833.

Savchenko, T., Basiurkina, N., Rodina, O., & Kwilinski, A. (2019). Improvement of the Assessment Methods of Product Competitiveness of the Specialized Poultry Enterprises. Management Theory and Studies for Rural Business and Infrastructure Development, 41(1), 43-61.

Schneider, F., & Enste, D. (2000). Shadow economies: Sizes, causes and consequences. Journal of Economic Perspectives, 38, 77–114.

Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New Estimates for the Shadow Economies all over the World. International Economic Journal, 24(4), 443–461. doi:10.1080/10168737.2010.525974

Tkachenko, V., Kwilinski, A., Korystin, O., Svyrydiuk, N., & Tkachenko, I. (2019a). Assessment of Information Technologies Influence on Financial Security of Economy. Journal of Security and Sustainability, 8(3), 375-385.

Tkachenko, V., Kwilinski, A., Klymchuk, M., & Tkachenko, I. (2019b). The Economic-Mathematical Development of Buildings Construction Model Optimization on the Basis of Digital Economy. Management Systems in Production Engineering, 27(2), 119-123.

Tkachenko, V., Kwilinski, A., Tkachenko, I., & Puzyrova, P. (2019c). Theoretical and Methodical Approaches to the Definition of Marketing Risks Management Concept at Industrial Enterprises. Marketing and Management of Innovations, 2, 228-238.

Tkachenko, V., Kwilinski, A., Kaminska, B., Tkachenko, I., & Puzyrova, P. (2019d). Development and Effectiveness of Financial Potential Management of Enterprises in Modern Conditions. Financial and Credit Activity: Problems of Theory and Practice, 3(30), 85-94.

Tkachenko, V., Kuzior, A., & Kwilinski, A. (2019e). Introduction of Artificial Intelligence Tools into the Training Methods of Entrepreneurship Activities. Journal of Entrepreneurship Education, 22(6), 1-10.

World Bank. (2018a). World Development Indicators 2018. World Bank. Retrieved from

World Bank. (2018b). Worldwide Governance Indicators. Retrieved from

Wu, D., and Schneider, F. (2019). Nonlinearity Between the Shadow Economy and Level of Development. IMF Working Papers, 19/48, 1-29. Retrieved from

Yelnikova, Y., & Miskiewicz, R. (2020). Implementation Mechanism of Impact Investing in the Post-Conflict Regions. Financial Markets. Institutions and Risks, 4(3), 53-65.

Yoo, T., & Hyun, J. K. (1998). International Comparison of the Black Economy: Empirical Evidence Using Micro-Level Data, paper presented at 1998 Congress of Int. Institute Public Finance, Cordoba, Argentina.

Zellner, A. (1970). Estimation of regression relationships containing unobservable independent variables. International Economic Review, 11(3), 441–454.




How to Cite

Lyulyov, O., & Moskalenko, B. (2020). Institutional Quality and Shadow Economy: An Investment Potential Evaluation Model. Virtual Economics, 3(4), 131–146.