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Institutional Complementarity across Countries in Bilateral FDI Flows: Theory and Evidence

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  • Pao-Li Chang

    (Singapore Management University)

Abstract

This paper builds a theory to characterize the comparative advantage of MNEs based in countries of different institutional qualities. It is shown that MNEs headquartered in countries of poorer state institutions will invest more in `informal institutions' and choose to undertake FDI in countries of weaker institutions. At the aggregate, MNEs on average generate more net profits in countries of weaker institutions, the poorer the institutional environment at home. I conduct an extensive test of the theory using bilateral FDI volume for 219 economies in year 2001-2010. The results indicate a statistically significant and robust institutional complementarity e ect in bilateral FDI volume.

Suggested Citation

  • Pao-Li Chang, 2015. "Institutional Complementarity across Countries in Bilateral FDI Flows: Theory and Evidence," Working Papers 16-2015, Singapore Management University, School of Economics.
    • Handle: RePEc:siu:wpaper:16-2015
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    File URL: http://ink.library.smu.edu.sg/soe_research/1793
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    More about this item

    Keywords

    Informal Institution; Foreign Direct Investment; Gravity Equation; Tobit;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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