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Informal Institutions and Comparative Advantage of South-Based MNEs: Theory and Evidence

Pao-Li Chang ()
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Pao-Li Chang: School of Economics, Singapore Management University

No 4-2018, Economics and Statistics Working Papers from Singapore Management University, School of Economics

Abstract: This paper builds a theory to characterize the comparative advantage of South-based MNEs rooted in `informal institutions'. MNEs hea dquartered in countries of poorer state institutions are theorized to invest more in firm-specific institutional capital to compensate for the lack of state institutions, and as an optimal response, undertake FDI in countries of weaker institutions, relative to another MNE of the same characteristics except their country of origin. At the aggregate, MNEs generate more net profits in countries of weaker institutions, the poorer the institutional environment at home. This assortative matching in the institutional qualities of FDI origins and destinations are tested extensively using bilateral FDI stocks (and flows) for 219 economies in years 2001-2010. The results indicate a statistically significant (and robust) institutional complementary effect in bilateral FDI activities.

Keywords: Informal Institution; Foreign Direct Investment; Gravity Equation (search for similar items in EconPapers)
JEL-codes: D02 D21 F21 F23 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018-01-10
New Economics Papers: this item is included in nep-int and nep-sea
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