Informal institutions and comparative advantage of South-based MNEs: Theory and evidence

• Main Author: Chang, Pao-li
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Informal Institution; Foreign Direct Investment; Gravity Equation; International Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research_all/21; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1020&context=soe_research_all
• Institution: Singapore Management University

This paper builds a theory to characterize the comparative advantage of South-based MNEs rooted in institutional qualities. MNEs headquartered in countries of poorer state institutions are hypothesized to invest more in `informal institutions', and as an optimal response, undertake FDI in countries of weaker institutions, all else being equal. At the aggregate, MNEs generate more net profits in countries of weaker institutions, the poorer the institutional environment at home. Extensive tests of the theory are conducted using bilateral FDI volumes for 219 economies in year 2001--2010. The results indicate a statistically significant and robust institutional complementarity effect in bilateral FDI volumes.