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

47 Pages Posted: 10 Jul 2013 Last revised: 17 Mar 2015

Wei Zhang

Singapore Management University - School of Law

Ji Li

Rutgers Law School

Date Written: July 9, 2013

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

Suggested Citation

Zhang, Wei and Li, Ji, Weak Law v. Strong Ties: An Empirical Study of Business Investment, Law and Political Connections in China (July 9, 2013). Available at SSRN: https://ssrn.com/abstract=2291787 or http://dx.doi.org/10.2139/ssrn.2291787

Wei Zhang

Singapore Management University - School of Law ( email )

School of Law
55 Armenian Street
Singapore, 179943
Singapore

Ji Li (Contact Author)

Rutgers Law School ( email )

123 WASHINGTON STREET
Newark, NJ NEW JERSEY 07102
United States

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