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 National Science
Foundation Award #0550573 |
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Collaborative Research: Legal Institutions and Doing Business: A Cross-Country Analysis |
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| Investigator(s): |
Vojislav Maksimovic (PI)
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| Sponsor: |
University of Maryland College Park, MD 20742 3014056269
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| Start Date/Expiration Date |
2006-07-01 to 2009-06-30 (amended 2006-03-23) |
| Awarded Amount to Date: |
$100,683 |
| Abstract: Recent academic business literature has shown that the quality of a countrys legal system has a significant effect on firms ability to conduct business, obtain external financing and to grow. This research has had important policy implications, with international agencies such as the World Bank and USAID implementing programs for the development of good legal institutions in developing countries, so as to facilitate effective business environments in these countries.
This project addresses the following questions: At the firm-level: (1) How do firms perception of specific legal issues such as the access to information about laws and regulations, consistent interpretation of regulation, consistency and enforceability of courts and confidence in the legal system to uphold their property rights, vary across firms of different sizes, ownership structures and legal forms? (2) Does the type and severity of legal problems faced by firms differ according to legal tradition and specific laws related to doing business such as bankruptcy procedures? (3) What is the impact of legal problems on firm growth and contracting relationships such as its ability to raise external financing and its propensity to enter into joint ventures with other firms?
At the macro level: (1) Which of the institutional theories recently advanced in the literature best explain firms perceptions of property rights, judicial efficiency, corruption, crime, taxes and regulation? How do these theories compare against one another? (2) Which of these institutional theories have a robust causal impact on specific laws, such as property rights protection? (3) What proportion of the firm-level variation in the perception of legal challenges can be explained by firm characteristics and what proportion can be explained by the country-level institutional theories?
The intellectual merit of the proposed activity: This research contributes to the literature on two fronts: the issues examined and the empirical methodologies adopted. First, there are several unresolved issues in the literature on the impact of institutions on firm behavior. In the existing micro-level literature, it is puzzling that some features of the legal system, such as firms perceptions of the impartiality of a countrys courts, that should affect firm performance, appear not to do so. Further, this literature does not explore the possibility that differently organized firms (partnerships, limited liability corporations) are affected differently by deficiencies in the legal system and that the deficiencies, either individually or together may adversely affect firm performance. The research proposed in this project will characterize the effect of legal system deficiencies on different types of firms in countries at different levels of development.
On the macro level, other researchers have attempted to ascertain which factors predict the existence of legal systems that support effective business environments. Thus, for example, it is of interest whether legal systems based on common law are perceived as being superior to those based on civil law, as some researchers claim, or whether a countrys initial endowments are a better predictor of legal institutions. However, there is a great deal of controversy about the importance of common law legal systems and endowments for business performance. A part of this controversy is due to the empirical challenges in identifying causal relations in the macro literature since there are comparatively few observations and many of the variables of interest vary together. While existing literature has paid little attention to ascertaining causal relations, in this project the researchers employ methodologies such as the extreme bounds analysis and also the more recently developed Directed Acyclic Graph methodology,, which allows them to examine direct and indirect causal impacts of the different institutional theories on legal protections.
The broad impact resulting from the proposed activity: The research agenda described in this project has much broader implications for the development debate and for international organizations by addressing how aid and government action can be best channeled towards overall development. This has particular relevance in examining the role of law in changes taking place in the former Socialist countries where institutions are still in a process of transition. Moreover, it has wide implications for governmental policy, which attempts to build institutions in developing countries that facilitate economic development, particularly the creation of legal systems and regulatory frameworks that promote commerce and result in the growth of successful business enterprises. Further, the methodological contribution from this project lends itself to application in other areas in law and finance. |
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| NSF Org: |
SES - Division of Social and Economic Sciences |
| Award Number: |
0550573 |
| Award Instrument: |
Standard Grant |
| Program Manager: |
Isaac Unah
SES Division of Social and Economic Sciences
SBE Directorate for Social, Behavioral & Economic Sciences
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| NSF Program(s): |
LAW AND SOCIAL SCIENCES |
| Field Application(s): |
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| Program Reference Code(s): |
UNASSIGNED, 0000 |
| Program Element Code(s): |
1372 |
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