In the new paper "How does Religion Bias the Allocation of Foreign Direct Investment? The Role of Institutions" Jérôme Hergueux examines these hypotheses:
. . . [R]eligious similarity should play more of a role for breeding interpersonal trust and promoting FDI in countries that have relatively weak formal institutions.
. . . [R]eligious diversity can promote bilateral FDI, it should be in countries that have relatively strong formal institutions.They find evidence in favor of these hypotheses.
This result means that the role of religious similarity for promoting FDI tends to weaken as the quality of formal institutions in the host country increases. Stated differently, religious similarity can be considered a substitute to the quality of formal institutions in the host country for promoting trust, reducing transaction or inspection costs and, ultimately, fostering FDI.
. . . [R]eligious similarity seems to foster FDI relatively more in countries that exhibit relatively low quality institutions, while the reverse holds for religious diversity.