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Weak Law v. Strong Ties: An Empirical Study of Business Investment, Law and Political Connections in China

  • Wei Zhang EMAIL logo and Ji Li
Published/Copyright: June 23, 2016
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Review of Law & Economics
From the journal Review of Law & Economics Volume 13 Issue 1

Abstract

Based on a large-scale survey of Chinese entrepreneurs, our study explores how legal and political institutions influence investment decisions made by private companies. The study finds that, consistent with the conventional view, a more effective legal system is correlated with short-term general investment, and that the judiciary is important mainly because of its restraint over the state. The role of effective courts, however, diminishes when private entrepreneurs consider making long-term investment. We find a positive association between the entrepreneurs’ political backgrounds and their R&D investment, suggesting that Chinese courts, in spite of decades of reform, are not yet viewed as reliable to protect long-term private investment from expropriation, policy instability, and a hostile regulatory environment. Rather, informal political connections constitute the premise for the protection of long-term investment. We also find evidence indicating that political ties are expensive resources to accumulate and maintain, so Chinese entrepreneurs tap into them only when substantial long-term interests are at stake. The findings contribute to the literature on law and economic development.

Appendix: Correlation matrix of main independent variables

Localcourtquality(ordinary)Localcourtquality(administrative)Nonlocalcourtquality(ordinary)Nonlocalcourtquality(administrative)CadrestatusOwner’sgenderOwner’seducationlevelOwner’sageLogowner’smanagementexperienceLogfirm’sageReturnonsalesLogemployeenumberAccessto bankloanLogpercapitaGDPLawyerindexMarketizationindex
1
–0.07491
0.2179–0.03701
–0.1145–0.0819–0.25981
0.03010.0500–0.01760.04551
0.02200.00490.1016–0.0405–0.03191
0.0345–0.0242–0.02390.13290.3223–0.04701
0.01110.00990.1145–0.09270.09580.0402–0.23571
0.00630.01540.0615–0.0755–0.17170.1017–0.15020.25601
–0.0044–0.02530.0372–0.0395–0.13820.0581–0.09290.12510.45371
–0.05050.0137–0.06190.0450–0.0053–0.01550.0010–0.0618–0.0218–0.01761
0.0808–0.06570.2417–0.09400.02100.08920.11030.04640.16820.0978–0.14031
0.0801–0.02030.1463–0.1369–0.04770.0694–0.03170.00920.08210.0626–0.05710.30141
0.0190–0.0801–0.05880.07930.0271–0.03900.07530.0007–0.0905–0.0624–0.0633–0.0956–0.13561
0.0553–0.0550–0.08280.11890.1292–0.05490.15900.0193–0.0857–0.0437–0.0267–0.0857–0.13860.78981
0.0270–0.0958–0.01580.0271–0.0344–0.00120.01360.0007–0.0551–0.0347–0.0748–0.0355–0.09740.83940.50371

Acknowledgments

We appreciate the valuable comments from Jinhua Cheng, Qingchi Li, Yingmao Tang, Frank Upham, Guangdong Xu, participants at the 25th annual meeting of the American Law and Economics Association and two anonymous reviewers. All errors are ours.

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Published Online: 2016-6-23
Published in Print: 2017-3-1

©2017 by De Gruyter

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https://doi.org/10.1515/rle-2014-0008

Articles in the same Issue

  2. The Economics of Scams
  3. Why Agents Need Discretion: The Business Judgment Rule as Optimal Standard of Care
  4. Voting Rules in Bankruptcy Law
  5. A Note on Trial Delay and Social Welfare: The Impact of Multiple Equilibria
  6. Malice Aforethought
  7. Weak Law v. Strong Ties: An Empirical Study of Business Investment, Law and Political Connections in China
  8. Estimating Judicial Ideal Points in Latin America: The Case of Argentina
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