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Complementarity in Institutional Quality in Bilateral FDI Flows

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  • Chang Pao-Li

    () (Singapore Management University)

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.

Suggested Citation

  • Chang Pao-Li, 2014. "Complementarity in Institutional Quality in Bilateral FDI Flows," Working Papers 20-2014, Singapore Management University, School of Economics.
  • Handle: RePEc:siu:wpaper:20-2014
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    File URL: https://mercury.smu.edu.sg/rsrchpubupload/25009/20-2014.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign Direct Investment; Informal Institution; Political Risk; Gravity Equation; Tobit;

    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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