Structural Reforms and the Growth of Developing-Country Multinational Firms

Abstract

We analyze the impact of structural reforms on the multinationalization strategy of developed, developing, and least-developed country firms. Structural reforms are a form of institutional change whereby a country's institutional framework is realigned to improve governance and facilitate market functioning. We argue that structural reforms help firms become multinationals by reforming institutions that support the international competitiveness and multinationalization of firms. However, we propose that structural reforms have a differential impact on the multinationalization strategy of firms depending on the level of institutional voids in the country. Specifically, we argue that structural reforms have the highest positive impact on the multinationalization strategy of developing-country firms, followed by developed-country firms, and then by least-developed country firms. Structural reforms especially accelerate the multinationalization of developing-country firms by reducing institutional voids that constrain their competitiveness, institutional voids that are not prevalent in developed countries. However, this is not the case for firms from the least-developed countries because countries have to be above a threshold of institutional development for their firms to fully benefit from structural reforms. As such, structural reforms reduce the multinationalization gap between developed and developing-country firms, but increase the gap between least-developed country firms and those from more developed countries.

Keywords: Structural reforms, multinationalization strategy, institutional voids, developing countries, least-developed countries, outward foreign direct investment, institutional economics

JEL Classification: F23, M16