Relationship Between Institutions And Trade
Gilbert (2002) explains the importance of ‘good governance or quality of institutions in addition to trade openness (policy). Also the effect of institutions on trade may result from their effect on the risks associated with international transactions. Anderson and Marcouiller (1997) found that the lack of security may prevent trafficking even though it offers the potential mutual gains. For example, predation reduces trade not only because it is a direct deduction on the flow of traded goods, but also because it diverts resources from their productive allocation towards the defense of property rights. It follows that good institution that may help bar predation and thus foster trade (Sekkat and Meon, 2004). Bigsten et al. (2000) examine the contractual practices of African manufacturing firms using survey data, I t is shown that contractual flexibility is common due to the risk. Although, a lot of studies find that institutions quality has a positive and sensitive impact on trade, this conclusion is not shared by Rodrik et. al (2002), the authors concluded that institutions have strong have effects on income while trade shows weaknesses. Lambsdorff (1998) finds that the corruption in importing countries influences the …show more content…
Wacziarg (2001) measures the impact of trade openness on economic growth in the long-run through a range of distinct channels, which include government size and enhanced government policy (institutional quality).
Quality of institutions and investment There is a lot of literature to explain the impact of institutions on FDI. The importance of the impact the institutional factors on (FDI) has long been understood in the economics literature. The earlier study by Bose (1963) finds that the political instability has an effect on FDI. More recently, the literature on impact of institutions on FDI increased for several reasons; first, it is widely believed that the trend towards integrated production and marketing has the major cause for developing country attractiveness to foreign direct investment (FDI). Second, the growth of FDI flows to developing countries since the early 1990s reflect that multinational enterprises have increased presence in these host countries as competitive investment locations. Together, many specialists confirmed that the determinants of FDI in developing countries have changed in the process of globalization. The investors are becoming more interested in institutional quality compared with traditional determinants of FDI when decide to invest in the country (Bevan et al 2004). This section reviews the recent