REGIONAL REGULATION QUALITY AND ECONOMIC GROWTH: THE ROLE OF ENTERPRISE GOVERNANCE AND FISCAL CAPACITY

Abstract

This study investigates the relationship between regional regulatory quality, corporate governance of regional-owned enterprises (badan usaha milik daerah, BUMD), fiscal capacity, and regional economic growth in Indonesia. Prior studies emphasize the central role of institutional and regulatory quality in shaping economic performance and governance outcomes (Karagiannis & Paleologou, 2025; Onafowora & Owoye, 2024). Using a panel dataset across provinces and applying moderated mediation analysis, the study finds that regulatory quality has a significant positive effect on economic growth, both directly and indirectly through corporate governance. The mediation is partial, with corporate governance accounting for 36.34 percent of the total effect. Fiscal capacity plays a dual role, acting as a direct driver of growth and as a moderator that strengthens the positive influence of regulatory quality on governance, and governance on economic growth, consistent with recent evidence on fiscal space and governance interactions (Katuka et al., 2024). Conditional indirect effect analysis reveals that the impact of regulatory quality through governance increases significantly in regions with higher fiscal capacity. A fiscal capacity threshold effect is also identified, indicating that governance reforms are more effective when fiscal space exceeds a certain level. These findings suggest that enhancing regulatory frameworks must be accompanied by fiscal strengthening and governance improvements to effectively drive regional development.