ARTIFICIAL INTELLIGENCE AND ECONOMIC GROWTH: DOES INSTITUTIONAL QUALITY MATTER? EVIDENCE FROM EUROPEAN ECONOMIES – International Journal of Education, Business and Economics Research (IJEBER)

Title: ARTIFICIAL INTELLIGENCE AND ECONOMIC GROWTH: DOES INSTITUTIONAL QUALITY MATTER? EVIDENCE FROM EUROPEAN ECONOMIES

Author:
Dimitra Mitsi

Abstract:
Artificial intelligence (AI) is increasingly transforming production, innovation, productivity, and organizational processes, yet its contribution to economic growth may depend critically on the institutional environment in which technological adoption takes place. This study examines the relationship between AI adoption, institutional quality, and economic growth across European economies, focusing specifically on the moderating role of governance.
Institutional quality is captured through the six Worldwide Governance Indicators: Government Effectiveness, Regulatory Quality, Rule of Law, Control of Corruption, Political Stability and Absence of Violence/Terrorism, and Voice and Accountability. The empirical framework evaluates both the direct effects of AI adoption and institutional quality and their interaction effects.
The study introduces the concept of institutional absorptive capacity, arguing that stronger institutions facilitate the transformation of technological opportunities into measurable productivity and economic growth. By examining governance dimensions separately, the analysis identifies which institutional characteristics are particularly important for strengthening the economic returns to AI.
The empirical findings indicate that AI adoption is positively associated with economic growth, but the magnitude of this effect depends significantly on the institutional environment. Regulatory Quality and Government Effectiveness emerge as the strongest moderators of the AI–growth relationship, followed by Rule of Law and Control of Corruption. Political Stability exhibits a weaker positive moderating effect, while Voice and Accountability does not generate a statistically significant interaction effect.
Overall, the findings support the central proposition that the economic returns of artificial intelligence are institution-dependent. The results suggest that policies aimed exclusively at increasing AI adoption may be insufficient unless accompanied by institutional reforms capable of improving regulatory predictability, public-sector effectiveness, contract enforcement, transparency, and the efficient allocation of technological resources.

Keywords: Artificial Intelligence; Economic Growth; Institutional Quality; Governance; Digital Economy; European Economies; Institutional Absorptive Capacity.

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