Formal and Informal Institutions, and FDI Flows: A Review of the Empirical Literature and Propositions for Further Research

Judit Kapas


The aim of this paper is to firstly, summarize the empirical literature dealing with the relationship between formal and informal institutions on one side and foreign direct investment (FDI) on the other, and secondly, to propose a possible path for further progress in the field. The main proposition of the paper is that when formulating hypotheses, the empirical research on the institutions-FDI nexus should rely (to a greater extent) on the theories from institutional economics, more specifically on the theory of institutional stickiness (Boettke et al., 2008) and the hierarchy of institutions (Williamson, 2000), and the theory of coevolution of culture (informal institutions) and formal institutions (Bisin and Verdier, 2017). Within the framework of these theories, the paper provides four suggestions as regards the manner in which further progress in the empirical research on the institutions-FDI nexus can be achieved.

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