Institutional imperfections and international trade: choice between domestic and multinational production

In this paper I study the effects of the institutional quality in combination with other factors on the choice of the firms between the horizontal multinational and domestic production regimes. I use the general equilibrium approach and perform a numerical simulation of the model. In the paper I find that given the lower institutional quality in the other country the firms would always prefer the one-plant domestic production to the multi-plant multinational production. The empirical results seem to support the theoretical findings of this paper.