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How do informal institutions influence inward FDI? A systematic review

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Abstract

In the last 15 years, the literature on international economics and international business has been paying increasing attention to informal institutions and to how they affect a variety of economic variables, inward FDI in particular. The main aims of this work are: to shed more light on a puzzling, elusive concept -informal institutions- also by drawing comparisons with related constructs; to overview the main types of informal institution and their effects on FDI inflows; to conduct a meta-analysis to explore the heterogeneity across empirical studies focusing on the effects of informal institutions on FDI inflows. The main findings of the present work are as follows: according to most of the existing literature, informal institutions, such as trust, social networks and corruption, matter for the purpose of attracting FDI. The sign is significantly determined by the type of informal institution considered. In particular, social networks and factors typically facilitating or in favour of FDI—such as trust and a positive attitude to liberalism—have a significant and positive impact on inward FDI, and this especially holds when the host country is a developing economy.

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Notes

  1. Dunning’s eclectic paradigm (often referred to as the OLI paradigm) is one of the frameworks most often used to explain the factors that induce a firm to become a multinational. See Dunning (2000) for a review.

  2. I adopted the United Nations classification of countries to identify developing economies. They represent quite a heterogeneous group, including both fast-growing economies such as China, India and Vietnam, and poor emerging economies like those of Sub-Saharan Africa. While the UN classification also labels the Eastern European countries that have joined the EU as advanced economies, I included them in “transition economies” group, together with the Western Balkan countries and the CIS countries.

  3. Smarzynska and Wei (2002) is cited by Mudambi et al. (2013), by Helmy (2013) and by Quazi (2014); Li & Filer (2007) is cited by Seyoum (2011) and by Wu et al. (2012); Bhardwaj et al. (2007) is cited by Wu et al. (2012) and by Zhao and Kim (2011); and Seyoum is cited by Wu et al. (2012) and by Helmy (2013).

  4. As mentioned in the note to Table 3, since the main aim of the empirical analysis is to see whether some types of informal institution can increase a country’s attractiveness in terms of inward FDI, the variable NEG_SIG was not used as a dependent variable as well. As expected, the main results of the probit regressions with NEG_SIG are that VALPOS_REL is significantly negative, while VAL_NEG is significantly positive.

  5. Other possible regressors—namely the “age” of the paper (given by the time elapsing between the current year, 2017, and the year when it was published), the use of a dependent variable other than FDI inflows, and the number of regressors - were not included because they were never significant or they correlated closely with other variables. In particular, the “age” of a study is partly captured by the FWCI. Moreover, positive values and relationships are both captured by a single regressor, VALPOS_REL, because they were strongly correlated.

  6. This dummy variable was included, rather than a dummy value of 1, to allow for some developing economies being included in the sample, since the latter would take a value of 1 in more than 90% of the observations, so it would be dropped from the model.

  7. An interesting recent paper by Casi and Resmini (2017) has explored this issue using the European regions as a sample. It was not included in the literature review, however, because it focuses on FDI-induced spill-overs conducive to growth and because, apart from the abstract, it is written in Italian.

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Acknowledgements

I thank Roberto Antonietti for his useful suggestions on previous version of the manuscript. This research received no specific grants from funding agencies in the public, commercial, or not-for-profit sectors.

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    Jasmine Mondolo

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Appendix

Appendix

See Tables 3, 4 and 5.

Table 3 The primary studies and the variables included in the meta-analysis
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Table 4 Summary statistics of the variables included in the meta-analysis
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Table 5 Pairwise correlations between the regression of the meta-analysis
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Mondolo, J. How do informal institutions influence inward FDI? A systematic review. Econ Polit 36, 167–204 (2019). https://doi.org/10.1007/s40888-018-0119-1

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