Bad Neighbors: Bordering Institutions as Comparative (Dis)Advantage
52 Pages Posted: 17 Jul 2015 Last revised: 7 Jan 2018
Date Written: November 20, 2017
Abstract
Rule of law is known to impact a country's own comparative advantage. This institution eases growth in industries intensive in customized inputs, which need better contract enforcement to avoid holdups. But most countries in the world are smaller than the natural size of the market for “nearby” suppliers and customers. We argue that neighboring nations' institutions could independently matter for specialization in these contract-intensive goods. In fact, we show that neighbors´ institutions are economically and statistically important for this comparative advantage, over and above a country's own institutions and many other confounding factors. When neighbors are culturally similar, then their rule of law is even more binding for contract intensive industries. Our findings are robust to a long battery of checks, including neighboring country´s controls, using imports, US imports and production data. Our results suggest that neighboring institutions could be a binding constraint for integration into regional or global value chains. It also provide a rationale for arbitration and dispute resolution across borders as a policy to raise the sophystication of exports.
Keywords: Make or buy, relationship specific investments, nearsourcing, arbitration, regional value chains, supply chain disruptions
JEL Classification: D23; D51; F11; L14; O11
Suggested Citation: Suggested Citation