How Do Institutions Matter for Foreign Firms?

Abstract: Confidence in institutions does vary among firms within and across countries. Impersonal relations on country level and ownership on firm level are important determinants of this heterogeneity. Based on more than 3,000 firms from up to 25 countries, we unbundle the effect of impersonal relations on confidence in property rights and contractual institutions. Our main finding is that with weak impersonal relations, foreign firms have significantly less confidence in institutions compared to private domestic firms. While generalized trust – the informal dimension of impersonal relations - is the dominant channel for differential property rights institutions, judicial independence - the formal dimension - turns out to have the same role for contractual institutions. The differences become insignificant at higher levels of impersonal relations. We provide several robustness checks addressing endogeneity, reporting bias and sample selection.