Trade Liberalization and Institutional Change

Minyuan Zhao, Kathy Fogel, Randall Morck and Bernard Yeung

No 2102, Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: Opening up to global trade and investment is often thought to trigger institutional improvement by raising the expected benefits of institutional reform and reducing incumbents' incentives and ability to preserve the status quo. However, recent experience is not entirely consistent with this conventional wisdom. We suggest an explanation based on variation across countries in firms’ reliance on ambient institutions. Large, well established, or state controlled firms depend less on an economy’s institutions than do small, incipient, or purely private sector firms. Multinational firms likewise can use their global organizations to sidestep weak local institutions. Firm heterogeneity of this sort can thus contribute to markedly different institutional responses to liberalization. Our framework also suggests that institutional development might occur in stages. In an economy whose basic institutions are sound, individuals rationally invest in entrepreneurial capability and firms rationally invest less in institution substitutes. Economies with firms that rely more on ambient institutions or with more potential entrants who would rely on those institutions are more likely to experience further institutional improvement following accession to the global economy. Economies with fewer firms or potential entrants dependent on sound institutions, in acceding to the global economy, may exhibit scant institutional improvement, and perhaps even institutional deterioration. Political rent-seeking is not necessary for the latter outcome, but expands the range of conditions under which it ensues.

Date: 2006
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.economics.harvard.edu/pub/hier/2006/HIER2102.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.economics.harvard.edu/pub/hier/2006/HIER2102.pdf [301 Moved Permanently]--> https://www.economics.harvard.edu/pub/hier/2006/HIER2102.pdf)

Related works:
Working Paper: Trade Liberalization and Institutional Change (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fth:harver:2102

Access Statistics for this paper

More papers in Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().