Table 5: Institutions as a Source of Comparative Advantage: Compared to Factor Endowments

||(1)|(2)|(3)|(4)|(5)|(6)|
|---|---|---|---|---|---|---|
|Rule of law|-0.075<sup>_∗∗∗_</sup>|-0.055<sup>_∗∗∗_</sup>|-0.085<sup>_∗∗∗_</sup>|-0.130<sup>_∗∗∗_</sup>|-0.105<sup>_∗∗_</sup>|-0.190<sup>_∗∗∗_</sup>|
|Rule of law x Inst-Int|0.074<sup>_∗∗∗_</sup>|0.064<sup>_∗∗∗_</sup>|0.071<sup>_∗∗∗_</sup>|0.113<sup>_∗∗∗_</sup>|0.098<sup>_∗∗_</sup>|0.141<sup>_∗∗∗_</sup>|
|lnH|-0.149<sup>_∗∗∗_</sup>|-0.022|-0.291<sup>_∗∗∗_</sup>|-0.160|-0.028|-0.590<sup>_∗∗∗_</sup>|
|lnH X H-Int|0.297<sup>_∗∗∗_</sup>|0.153<sup>_∗∗∗_</sup>|0.424<sup>_∗∗∗_</sup>|0.116|-0.061|0.715<sup>_∗∗∗_</sup>|
|lnK|-0.260<sup>_∗∗∗_</sup>|-0.361<sup>_∗∗∗_</sup>|-0.053|-0.233|-0.256|-0.101|
|lnK X K-Int|-0.064<sup>_∗∗∗_</sup>|0.006|-0.147<sup>_∗∗∗_</sup>|-0.017|0.062|-0.289<sup>_∗∗∗_</sup>|
|NR|-0.008<sup>_∗∗_</sup>|-0.003|-0.013<sup>_∗∗∗_</sup>|-0.002|0.013|-0.056<sup>_∗∗_</sup>|
|NR X N-Int|-0.010<sup>_∗∗∗_</sup>|-0.010<sup>_∗∗∗_</sup>|-0.008<sup>_∗∗∗_</sup>|-0.004|-0.007|0.008|
|lnESTABLISH|0.025<sup>_∗∗∗_</sup>|0.030<sup>_∗∗∗_</sup>|0.012<sup>_∗∗∗_</sup>|0.044<sup>_∗_</sup>|0.054<sup>_∗∗_</sup>|-0.001|
|lnGDPE|0.972<sup>_∗∗∗_</sup>|0.817<sup>_∗∗∗_</sup>|0.943<sup>_∗∗∗_</sup>|1.754<sup>_∗∗∗_</sup>|1.537<sup>_∗∗∗_</sup>|2.137<sup>_∗∗∗_</sup>|
|lnGDPI|0.173<sup>_∗∗∗_</sup>|0.226<sup>_∗∗∗_</sup>|0.054<sup>_∗∗_</sup>||||
|No. of Observations|720679|720679|720679|9377|9377|9377|
|F-Statistic|77.72|39.16|111.5|81.11|43.07|45.42|
|Prob _>_ F-Statistic|0.000|0.000|0.000|0.000|0.000|0.000|
|R<sup>2</sup>|0.706|0.525|0.838|0.922|0.901|0.916|
| ̄_R_<sup>2</sup>|0.702|0.520|0.836|0.921|0.900|0.915|

_∗ ∗∗ ∗∗∗ p <_ 0 _._ 1, _p <_ 0 _._ 05, _p <_ 0 _._ 01. Standardized beta coefficients reported. The dependent variables are, respectively: (1) _ln(Export)jist_ , (2) _ln(Export/Variety)jist_ , (3) _ln(No. of Varieties)jist_ , (4) _ln(Export)jst_ , (5) _ln(Export/Destination)jst_ , and (6) _ln(No. of Destinations)jst_ . All regressions include (unreported) industry and year fixed effects. In addition, each regression includes either exporter-importer (Columns 1-3) or exporter (Columns 4-6) fixed effect. Error terms are clustered by exporter-importer (Columns 1-3) or exporterindustry (Columns 4-6) pairs. The 50-bins dummy variable approach is used to correct for selection-bias.

capital outperforms institutional quality in terms of the number of destinations (Column 6). The findings in Columns 4 and 5 are consistent with the original claim by Nunn (2007). Hence, the level of aggregation (suppressing the importer dimension) appears to be the driver of Nunn’s claim.

In sum, although institutional quality is a robust source of comparative advantage, the traditional source and particularly human capital appears to be of greater importance. This result is in direct contrast with the finding of Nunn (2007). Eliminating the importer dimension (through aggregation) produces results that are closer to Nunn’s.

**Heterogeneous Effect** To assess whether the effect of institutional quality on trade flow differs between developed and less developed countries, we interacted our variable of interest ( _Rule of Law_ x _Inst-Int_ ) with a developed country dummy ( _OECD_ ) and re-estimated our models. The estimation results are summarized in Table 6.

In terms of the effect on total export conditional on exporting, the return to institutional quality improvement for OECD exporters is significantly lower than the return for the non-OECD counterparts. This is robust to the use of the alternative techniques of controlling for selection into exporting (Columns 1 and 2). As to the influence on the number of product varieties exported (Columns 3 and 4), OECD members seem to achieve more than non members – although the benefit to both groups is positive and the difference is statistically insignificant. In terms of average export per variety (Columns 5 and 6), the differential benefit that being a developing country exporter fetches from institutional quality improvements is even larger. Overall, while both developed and developing countries benefit from improved institutions, developing countries benefit more. This differential effect favorable to developing 18