Courts and Firm Investments in Real Property

Abstract:

The legal environment and rule of law are important for business, but existing studies often treat rule of law holistically. This article examines the role of courts, specifically the speed of court decisions, the enforcement of edicts, and the impartiality of decision-making as perceived by firms of various sizes, and the impact this has on firm investments in real property. The article analyzes a panel of 6,300 firms from 27 countries in the period from 2002 to 2009 to find that (i) firm size affects perceptions positively, while (ii) paying bribes affects perceptions negatively. At the same time, (iii) a firm’s connections to the government have no apparent impact. More importantly, while all three components have a positive correlation with the amount firms invest in land and machinery, the speed of courts has the greatest significance and the highest marginal effect. Firms perceiving courts to be quick invest nearly four times as much as the average real property investment. This finding suggests that policymakers should focus on reducing backlogs in the court system, perhaps by encouraging more arbitration or staffing more clerks.

Keywords::

• courts
• Europe
• perception vs. reality
• policy
• resource-based view
• rule of law

JEL Classification Codes::

• C12
• F55
• K00
• M13
• O50
• P48

Notes

¹ The World Bank Enterprise Survey is the source data. Small firms have less than 20 full-time employees, medium firms have 20-99 full-time employees, and large firms have over 100 full-time employees.

² For a complete explanation, please refer to pp. 273–274 in the Appendix of the EFW 2012 Annual Report. The source data for Impartial Courts is the Global Competitiveness Report, while for Integrity of the Legal System it is the International Country Risk Guide.

³ A discussion of firm size appears in the “Data and Methodology” section of this article. Head count is the determinant as small being fewer than twenty employees, medium being between 20-99 employees, and large being over one hundred employees.

⁴ We use “privatization” here in the same sense as Saul Estrin (1997), where a controlling interest in a company switches from state to private hands.

⁵ As a robustness check, using the continuous variable Head count in lieu of Medium and Large results in similar findings. As firm size grows, firms are more likely to perceive courts to be fair, strong, and quick. The marginal effect is the change in likelihood of agreement with the dependent variable per additional employee. It is more intelligible to speak of the change in terms of greater numbers of employees. For each thousand additional employees, the likelihood of agreement increases by 5.0 percent for Court fair and Court enforce and 2.0 percent for Court quick.

⁶ We do not calculate marginal effects for this interactive term and others since the interpretation of such is arbitrary — i.e., how much change is due to Headcount vs. Payments cannot be determined. The value of these interactive terms is exceedingly small, given the range for Headcount. Our purpose is to gauge how the variable of interest might move with firm size.

Additional information

Notes on contributors

Michael Troilo

Michael Troilo is the Wellspring associate professor of international business in the Collins College of Business at the University of Tulsa. J. Markham Collins is a professor emeritus at the same institution.

J. Markham Collins

Michael Troilo is the Wellspring associate professor of international business in the Collins College of Business at the University of Tulsa. J. Markham Collins is a professor emeritus at the same institution.