<p>This paper delves into the pivotal role of institutions in facilitating knowledge spillovers, particularly in the context of multinational enterprises (MNEs) and knowledge transfer. While extant literature highlights the positive correlation between good institutional quality and knowledge transfer, this paper introduces a nuanced perspective. It argues for an inverted U-shaped relationship, suggesting that MNEs may exhibit reluctance in knowledge transfer to subsidiaries not only in environments with low institutional quality, as conventionally discussed, but also in those characterized by high institutional quality. In fact, there are beneficial implications of good institutions for domestic firms as well, enabling greater capacity to absorb knowledge and thereby emerge as competitors of MNEs. The paper demonstrates an inverted U-shaped relationship between spillovers, to capture knowledge transfer, and the quality of local institutions. This study provides valuable insights into the complex dynamics of knowledge spillovers, emphasizing the multifaceted influence of institutional environments on knowledge dissemination and economic development.</p>