Resumen:

Recent research shows that a country's rule of law impacts its own comparative advantage, easing growth in industries intensive in customized inputs, arguably because these industries need better contract enforcement to avoid holdups. But most countries in the world are smaller than the natural size of the market for “nearby” suppliers and customers. Therefore, we argue that neighboring nations' institutions could independently matter for specialization in these contract-intensive goods. For example, while Mexico and Italy have neighbors with better contract enforcement than their own; countries like Israel, Chile or Finland have neighbors with significantly worse rule of law. Empirically we show that, first, neighbors´ institutions are at least as important for this comparative advantage as own country institutions. When neighbors are closer or culturally similar, the estimated effect of their rule of law seems even more binding for contract intensive industries. Our results are robust to a long battery of checks, including neighboring country´s controls, using exports, US imports and production data. Our results suggest that policies improving contract enforcement in neighboring nations or across borders could change countries' productive specialization.