The Quality of Domestic Legal Institutions and Export Performance

Abstract

Does the quality of domestic legal institutions matter for export performance? How does differential access to protections and privileges offered by informal institutions moderate the relationship between the quality of formal legal institutions and export performance? To answer these questions, we develop a theoretical framework drawing on insights from trade theory and institutional theory. We propose that higher-quality legal systems in an exporter’s location are associated with higher export performance, particularly when trade partners face higher levels of external and internal uncertainty. We further propose that firms that have less access to local informal institutions to reduce transaction costs and opportunism benefit more from better-developed legal institutions. Using information for more than 198,000 firms and legal quality information for 120 cities in China, we find strong support for our predictions. We discuss our contributions to the literature on institutions and export.