Institutional complementarity across countries in bilateral FDI flows: Theory and evidence

• Main Author: CHANG, Pao-Li
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Informal Institution; Foreign Direct Investment; Gravity Equation; Tobit; International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1793; https://ink.library.smu.edu.sg/context/soe_research/article/2792/viewcontent/P_ID_52655_16_2015.pdf
• Institution: Singapore Management University

This paper builds a theory to characterize the comparative advantage of MNEs based in countries of different institutional qualities. It is shown that MNEs headquartered in countries of poorer state institutions will invest more in `informal institutions; and choose to undertake FDI in countries of weaker institutions. At the aggregate, MNEs on average generate more net profits in countries of weaker institutions, the poorer the institutional environment at home. I conduct an extensive test of the theory using bilateral FDI volume for 219 economies in year 2001-2010. The results indicate a statistically significant and robust institutional complementarity effect in bilateral FDI volume.