Corruption, Institutions and Internationalization Strategies by Swedish Firms

A new research program at Ratio explores the area of how institutions affect international exchange. When analyzing the world trade, one finds that actual trade is smaller than predicted by theory. This is particularly interesting for Sweden with an open, export oriented economy. Taking stance from internationalization strategies of Swedish firms the project will explore how there can be missing trade and how institutions influence trade.

Since WWII transportation costs, tariffs and quotas has decreased from levels in the 30-70 percentage bracket to just a few percentage points. The following globalization has lead to a view that the world has become flat, that is, many previously isolated countries have become part of the global supply chain. But is the world flat? Considering that about 70 percent of Swedish exports are directed to Europe makes one doubt of a flat world. In addition, analyzing world trade one finds that actual trade is smaller than predicted by theory, this is particularly true for North-South trade. How can there be missing trade?

If world trade is smaller than predicted, institutions may help to explain the mystery of missing trade. When formal barriers to trade decrease, other barriers become more important. This is one reason behind the increased attention that institutions are receiving. The intuition why institutions have an impact on trade is that international exchange does not occur without personal interaction. For trade to occur, agents from different jurisdictions have to agree on a contract, and since perfect contracts cannot be achieved, agents are left with imperfect realizations.

When formulating a cross-firm cross-border contract, well functioning institutions reduces the risk of opportunistic behavior, enhance law enforcement, secure property rights, reduce corruption and clarify labor market regulations. Institutions can also affect costs for monitoring and control and reduces the risk of defection and enhance interpersonal exchange. It is therefore evident that good institutions are central for trade and institutions are even considered as a source of comparative advantage, comparable with having abundance of capital or high skilled labor. To make the point; the role of intuitions is estimated to be even greater than that of tariffs.

Considering the central role played by institutions, it surprising that empirical research in this area still is in its infancy. There are many questions on how institutions affect international exchange that are yet to be answered.

Since 2011, a research program at Ratio explores the area of how institutions affect international exchange.  Considering that economic growth today is much faster in China and South East Asia than in Europe, the need of understanding foreign institutions can probably not be overestimated. Taking stance from internationalization strategies observed by Swedish firms, the program seeks to analyze questions such as:

 

• How is the choice of country and traded volumes affected by institutional quality in target economies?
• Is there any composition effects?
• What kind of institutions is most important for international exchange and which are less important?
• Is there asymmetries' between imports, exports, offshoring and FDI?
• Is there any dynamic effects?
• Is it possible to detect successful strategies that lead to long lasting exchange even when dealing with a partner located in a country with weak institutions?
• Are global firms less sensitive to weak institutions than other firms?

 

The program will not only increase our understanding of how institutional quality in other markets affect Swedish firms, it will also indicate how Sweden would be affected it the trust and functionality of our domestic institutions would fail.

The project is financed by Torsten Söderberg foundation and managed by Patrik Tingvall, PhD.