Weak law v strong ties: An empirical study of business investment, law and political connections in China

• Main Authors: ZHANG, Wei, LI, Ji
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: Law; economic development; property rights protection; guanxi; political connections; Chinese courts; legal system; Asian Studies; Law and Economics; Political Economy
• Online Access: https://ink.library.smu.edu.sg/sol_research/2319; https://ink.library.smu.edu.sg/context/sol_research/article/4271/viewcontent/SSRN_id2291787.pdf
• Institution: Singapore Management University

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.