Complementarity in Institutional Quality in Bilateral FDI Flows

• Main Author: CHANG, Pao Li
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Foreign Direct Investment; Informal Institution; Political Risk; Gravity Equation; Tobit; Economics; International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1604; https://ink.library.smu.edu.sg/context/soe_research/article/2603/viewcontent/20_2014.pdf
• Institution: Singapore Management University

This paper develops a theory on the complementarity in institutional qualities between the home and host countries in bilateral FDI. Firms ‘born’ in countries with poorer institutions tend to invest more in informal institutions to mitigate political risk. The marginal advantage of higher informal institution endowment is bigger when the political risk at the FDI destination is higher. Thus, all else being equal, the ranking of the MNE’s home institutions predicts the ranking of the institutional qualities of their FDI destinations. I find robust empirical evidence for this theoretical prediction using bilateral FDI for 219 economies during year 2001-2010.