Institutional quality as a barrier to trade

Abstract

Improvement of institutional quality abroad encourages new domestic firms to export to these countries, but has no effect on the volume of exports from incumbent firms. Thus, poor institutional quality acts as a barrier to the extensive margin of trade. As a result, policies that encourage the strengthening of foreign institutions coincide with national export initiatives such as the one launched by President Obama in 2010.

Keywords:

• export initiatives
• trade margins
• institutional quality

JEL Classification:

• F10
• F13
• F50

Notes

1 The stage 1 equation is: , where i is the exporting country and j is the importing country.

2 Conceptually, common religion may influence a firm's decision to export to a given country, but not the volume of exports. See HMR for support of common religion as a valid instrument.

3 The vector of gravity variables include: distance between country i and country j, GDP in countries i and j, population in countries i and j and seven dummy variables equal to one if country i and country j (1) share a common official language, (2) are both landlocked, (3) are both islands, (4) are contiguous, (5) have the same legal origin, (6) belong to the same currency union or (7) belong to the same free trade agreement and zero otherwise.

4 Please refer to Kaufmann et al. (2010) for more details on the WGI and how they are computed.