Multinationals, Institutions and Economic Growth in China

This study examines the effects of multinationals and economic institutions on the economic growth of cities in China. Consistent with previous findings, the empirical results suggest that property rights institutions are significantly more important than contracting institutions in promoting economic growth. The direct effect of multinationals on economic growth is generally insignificant statistically. However, a statistically significant and robust interaction effect exists between property rights institutions and multinationals on economic growth, whereas no such effect is observed between contracting institutions and multinationals. The results are attributable to the fact that multinationals can rely on reputation or personal connections to enforce contracts when contracting institutions are weak. However, it is difficult for multinationals to operate when the state expropriates their profits (i.e. property rights institutions are weak).