Complementarity in Institutional Quality in Bilateral FDI Flows

Pao-Li Chang ()

No 20-2014, Working Papers from Singapore Management University, School of Economics

Abstract: 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.

Keywords: Foreign Direct Investment; Informal Institution; Political Risk; Gravity Equation; Tobit (search for similar items in EconPapers)
JEL-codes: C21 C23 C24 F21 F23 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-10
New Economics Papers: this item is included in nep-int, nep-pol and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in SMU Economics and Statistics Working Paper Series

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