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FDI and Institutions: Formal and Informal Institutions

Multinational Enterprises, Markets and Institutional Diversity

ISBN: 978-1-78441-422-1, eISBN: 978-1-78441-421-4

Publication date: 25 October 2014



This chapter examines the role of formal and informal institutions in foreign direct investment (FDI) dynamics.


We examine the effects of the quality of legal, political, and economic formal institution as well as the effect of institutional distance (based on new dataset) on bilateral inward FDI stocks in 34 Organization for Economic Cooperation and Development countries for the period 1990–2010 using a gravity specification. Additionally, we also examine FDI for the effects of a specific informal institution – attitude of the public toward economic liberal issues. Reactions of FDI to liberal and nonliberal public opinion (part of informal institutions) are examined with and without controlling for formal institutions.


Findings show that the quality of legal and political institutions are important determinants of FDI, that legal and political institutional distance are both significant obstacles to FDI, and that public opinion also matters. We find that it is important to control for formal institutions when looking at the effect of informal institutions, and that both past liberal and nonliberal public opinion correlate with FDI, but only nonliberal public opinion significantly reduces inward FDI directly.

Research limitations/implications

Results are relevant for enterprises’ investment strategies, marketing strategies influencing public opinion as well as for policy makers, and governmental agencies involved in investment promotion programs.


Exploring the interplay between formal and informal institutions, institutional quality, institutional distance, and their effect on FDI in a bilateral panel.



Kunčič, A. and Jaklič, A. (2014), "FDI and Institutions: Formal and Informal Institutions", Multinational Enterprises, Markets and Institutional Diversity (Progress in International Business Research, Vol. 9), Emerald Group Publishing Limited, Leeds, pp. 171-205.



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