Trade Liberalization and Institutional Change

54 Pages Posted: 20 Dec 2005

See all articles by Kathy Fogel

Kathy Fogel

Suffolk University - Department of Finance

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Minyuan Zhao

University of Pennsylvania

Bernard Yin Yeung

National University of Singapore - Business School

Date Written: December 2005

Abstract

Opening up to global trade and investment is often thought to trigger institutional improvement by raising the expected benefits of institutional reform and reducing incumbents' incentives and ability to preserve the status quo. However, recent experience is not entirely consistent with this conventional wisdom. We suggest an explanation based on variation across countries in firms' reliance on ambient institutions. Large, well established, or state controlled firms depend less on an economy's institutions than do small, incipient, or purely private sector firms. Multinational firms likewise can use their global organizations to sidestep weak local institutions. Firm heterogeneity of this sort can thus contribute to markedly different institutional responses to liberalization. Our framework also suggests that institutional development might occur in stages. In an economy whose basic institutions are sound, individuals rationally invest in entrepreneurial capability and firms rationally invest less in institution substitutes. Economies with firms that rely more on ambient institutions or with more potential entrants who would rely on those institutions are more likely to experience further institutional improvement following accession to the global economy. Economies with fewer firms or potential entrants dependent on sound institutions, in acceding to the global economy, may exhibit scant institutional improvement, and perhaps even institutional deterioration. Political rent-seeking is not necessary for the latter outcome, but expands the range of conditions under which it ensues.

Suggested Citation

Fogel, Kathy and Morck, Randall K. and Zhao, Minyuan and Yeung, Bernard Yin, Trade Liberalization and Institutional Change (December 2005). Harvard Institute of Economic Research Discussion Paper No. 2098. Available at SSRN: https://ssrn.com/abstract=871208 or http://dx.doi.org/10.2139/ssrn.871208

Kathy Fogel

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governence Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Bureau of Finance and Economic Research ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Minyuan Zhao

University of Pennsylvania ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
283
Abstract Views
2,074
rank
109,335
PlumX Metrics