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

Pao-Li Chang and Yuting Chen

Journal of Development Economics, 2021, vol. 148, issue C

Abstract: This paper builds a theory based on “informal institutions” to characterize the comparative advantage of South-based MNEs. MNEs headquartered in countries with poorer state institutions are shown to endogenously invest more in firm-specific institutional capital to compensate for the lack of state institutions, and as an optimal response, undertake FDI in countries with weaker institutions. We conduct an extensive test of the theory using worldwide firm-level greenfield FDI flows during 2009–2016, employing (among others) variations in the interaction of prevalence of informal institutions at home and state institutional qualities of host countries, as well as heterogeneity across sectors and firms in their sensitivity to institutional support.

Keywords: Informal institution; Firm productivity; Firm R&D intensity; FDI location (search for similar items in EconPapers)
JEL-codes: D02 D21 D22 F21 F23 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jdeveco.2020.102566

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Handle: RePEc:eee:deveco:v:148:y:2021:i:c:s0304387820301413