Capital Flow, Institutional quality and Terms of Trade

San Miguel de Tucuman

Conferencia; Reunión Anual; 2016

AAEP

This paper studies the relationship between FDI and the TOT in the less developedcountries in response to the institutional quality that each presents. Our hypothesis is thatthe least developed countries with low institutional quality are reluctant to invest Rodrik[2007], suer from credit constraints Agenor and Aizenman [2004], and face an endogenousrisk premium given the asymmetries of information, depend on their collateral Gertler andRogo [1990], closely linked to the behavior of their TOT. We found that the coecient thatmeasures the response of FDI to TOT is decreasing with institutional quality. Countrieswith low quality experience a penalty for having low institutional quality.