Formal and Informal Institutions in Bilateral Trade:

This study contributes to the research domain concerned with the relationship between institutions and bilateral trade in simple versus complex goods by considering the effect of formal and informal institutions on the imports of low versus high technology manufactures. Two product groups which are analogous to simple and complex goods. In this respect, a gravity model of bilateral trade between 69 countries was examined utilizing the fixed effects estimator for the period 1996-2014. Formal institutions were proxied by the quality of the governance and informal institutions by generalized morality, each for each trading partner. The results corroborate the findings of the research domain, whereby formal and informal institutions have a more significant impact on the trade of complex goods than simple goods. Both good governance and generalized morality have been found to have a more considerable influence on the imports of high technology manufacture in comparison to that of low technology manufactures. However, unlike the expectations set by theory, it is not the formal institutions of the exporter which were found to be the most influential for trade. This study finds good governance of the importer to be more influential than that of the exporter. For informal institutions, the generalized morality of the exporter is found to be most influential in comparison to that of the exporter. The results indicate the significance of both formal and informal institutions in influencing bilateral trade. Literature attribute this significance to their importance in mitigating transaction costs in trade. Better data, especially of informal institutions, is especially warranted along with further studies using more advanced methodologies to substantiate the findings obtained herein.