Contract institution and differentiated exports

Abstract

Institution is an important determinant of economic growth and development. Contract institution represents a major institution governing economic transactions between private agents. This paper examines how quality of contract institution in source and destination countries influences exports of homogeneous and heterogeneous goods. Using a large sample of cross-country bilateral disaggregate export data, we show that competitive advantages of firms in exports of both homogeneous goods (such as agricultural commodities and minerals) and heterogeneous goods (such as manufactured goods) are eroded by weak contract institution in their source countries. We also find that weak contract institution in the destination countries exerts significant negative impacts on heterogeneous but not homogeneous exports. To explain for the differential source and destination countries’ contract institutional constraints on differentiated exports, we extend the conventional institutional cost theory by taking the differences in relationship specificity of heterogeneous and homogeneous goods into account. Our analysis has policy implications on institutional reform and provides practical location and production strategies for exporting firms.

Keywords:

• Contract
• institution
• export
• homogenous
• heterogenous
• product differentiation

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 According to the Standard International Trade Classification (SITC), relatively homogeneous commodities include food and live animals (SITC 0), beverages and tobacco (SITC 1), crude materials (SITC 2), minerals, fuels, lubricants and raw materials (SITC 3), animal and vegetable oils, fats and waxes (STIC 4), chemicals and related products (SITC 5); and relatively heterogeneous goods comprise manufactured goods (SITC 6), machinery and transport equipment (SITC 7), miscellaneous manufactured articles (SITC 8), and other transactions (SITC 9).

2 Ault and Spicer (2014) used cross-country data to analyze the role of national institutions in shaping the ability of commercial enterprises to reach the global poor but did not use such data to assess exports.

3 It is important to tackle endogeneity problem in international business research (Reeb, Sakakibara, and Mahmood 2012).

4 Note that our comparisons of the size coefficients are appropriate because the institutional independent variables are the same while the dependent variables vary.

Additional information

Notes on contributors

Xinpeng Xu

Xinpeng Xu is Professor of Economics at Faculty of Business, the Hong Kong Polytechnic University, Hong Kong. His research interests are in the areas of international trade and applied economics. He has published extensively in reputable international refereed journals. He is the senior track editor of China Accounting and Finance Review and the co-editor of Journal of Chinese Economic and Business Studies.

Jan P Voon

Jan P. Voon is Associate Professor of Economics at Department of Economics, Faculty of Social Science, Lingnan University, Hong Kong. He specializes in international trade, the Chinese economy, ASEAN economies, cost benefit analysis, and public finance. He published in more than 50 articles in international journals.

Yan Shang

Yan Shang works in the Industrial and Commercial Bank of China, Beijing, China. Prior to her employment in ICBC. She obtained her PhD at the University of Chinese Academy of Sciences, China.