Edited by Gary P. Freeman and Nikola Mirilovic
Chapter 6: Migrant networks, political institutions and international investment
The importance of institutional quality for the efficiency of markets has long been recognized by both scholars and policymakers. Transparent institutions provide individuals with information about investment opportunities while credible institutions allow those individuals some measure of confidence that contracts will be honored. This is of significance when engaging in cross-national economic activity, especially when activities such as investment are conducted at arm’s length. But quality institutions do not always exist; sometimes they are difficult or costly to construct, while at other times there are administrative barriers to their creation. Does this mean that countries without transparent and credible institutions will be unable to access global capital markets? Clearly the answer is ‘no’, as even cursory observation reveals that countries with weak institutions – from Azerbaijan to Zimbabwe – receive investments from abroad. This investment occurs because migrant networks – chains of co-ethnics – drive investment from their host countries to their countries of origin. Migrant networks not only serve as a source of information about investment opportunities across national borders, but they also reduce the cost of enforcing international contracts. As such they serve as a substitute for expectation-stabilizing institutions.
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