Are institutions in developing countries malleable?

Economists have recently emphasized Solow growth factors, physical capital, labor, and technology (“proximate” causes) depend on fundamentals like geography, culture, and institutions. I consider one of these fundamentals, institutions, and analyze whether they are malleable by a contemporary economic variable, globalization. The globalization I consider is of production through multinational corporations. Using the recently available data on institutional quality for almost all countries, I show institutional quality is higher with a greater FDI presence in developing countries. Nevertheless, there is no statistically significant effect on the same institutional variables in developed countries. By some measures, the income-gap between the rich and poor countries has worsened in the post-1950 period, and a consensus has emerged that poor institutions are to be blamed. A policy of encouraging FDI is likely to have the additional effect of improving institutions in developing countries and may have a greater potential to reduce income gaps than has been realized.