Legal Institutions and International Trade Flows

Why do domestic legal institutions matter, and why can trading parties-in particular exporters of complex goods-not easily opt-out of their domestic legal institutions? The authors argue that domestic institutions remain important even in a globalized world, because they are the final option for enforcing a claim against a party in the event of a breach of contract. International contracts take place in the shadow of the parties' home institutions. Unless parties can negotiate a settlement, or the losing party voluntarily complies with a foreign court or arbitration ruling, the winning party must seek enforcement against the assets of the losing party- and they tend to be located primarily in that party's home jurisdiction.

For reasons further explained below, importers and exporters are not equally exposed to the risk of bad domestic institutions' actions. By implication, exports, and particularly complex goods exports suffer more from bad legal institutions in the exporter's home jurisdiction, than imports.