Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2017

Abstract

Based on a large-scale survey of Chinese entrepreneurs, our study explores how institutions (formal and informal) 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 vast literature on law and economic development.

Keywords

Law, economic development, property rights protection, guanxi, political connections, Chinese courts, legal system

Discipline

Asian Studies | Law and Economics | Political Economy

Publication

Review of Law and Economics

Volume

13

Issue

1

First Page

1

Last Page

47

ISSN

1555-5879

Identifier

10.1515/rle-2014-0008

Publisher

De Gruyter

Additional URL

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

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