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Does the Rights Hypothesis Apply to China?

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  • Cheryl Xiaoning Long

Abstract

Using firm-level data from a World Bank survey, this paper examines how legal development in China relates to various firm decisions. I find that a more active court system is associated with more investment, more adoption of technology, more innovation, and more complex transactions. Specifically, when a higher percentage of business disputes are resolved through the court system, firms tend to have higher investment rates, higher propensities to adopt new automated technology, and higher probabilities of developing new products. In addition, they tend to have more nonlocal sales. These findings are consistent with a sophisticated version of the rights hypothesis, in which the rule of law eventually replaces relation-based governance as a superior governance mechanism. I find two limitations of China's legal system. The court system does a better job facilitating the growth of state-owned enterprises than of private firms, and it protects local firms better than nonlocal firms.

Suggested Citation

  • Cheryl Xiaoning Long, 2010. "Does the Rights Hypothesis Apply to China?," Journal of Law and Economics, University of Chicago Press, vol. 53(4), pages 629-650.
  • Handle: RePEc:ucp:jlawec:doi:10.1086/649031
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    References listed on IDEAS

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    1. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    2. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
    3. Easterly, William & Levine, Ross, 2003. "Tropics, germs, and crops: how endowments influence economic development," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 3-39, January.
    4. Arvind Subramanian & Francesco Trebbi & Dani Rodrik, 2002. "Institutions Rule; The Primacy of Institutions over Integration and Geography in Economic Development," IMF Working Papers 02/189, International Monetary Fund.
    5. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(3), pages 637-658, October.
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    Cited by:

    1. Aboal, Diego & Noya, Nelson & Rius, Andrés, 2014. "Contract Enforcement and Investment: A Systematic Review of the Evidence," World Development, Elsevier, vol. 64(C), pages 322-338.
    2. Long, Cheryl Xiaoning & Wang, Jun, 2015. "Judicial local protectionism in China: An empirical study of IP cases," International Review of Law and Economics, Elsevier, vol. 42(C), pages 48-59.
    3. Chen, Deqiu & Li, Sifei & Xiao, Jason Zezhong & Zou, Hong, 2014. "The effect of government quality on corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 384-400.
    4. Cull, Robert & Xu, Lixin Colin & Yang, Xi & Zhou, Li-An & Zhu, Tian, 2017. "Market facilitation by local government and firm efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 460-480.
    5. Ng, Travis, 2013. "Information acquisition and institutions: An organizational perspective," Information Economics and Policy, Elsevier, vol. 25(4), pages 301-311.
    6. Fan, Joseph P.H. & Gillan, Stuart L. & Yu, Xin, 2013. "Innovation or imitation?," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 208-234.
    7. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
    8. Tran, Hien Thu & Santarelli, Enrico, 2018. "Successful Transition to a Market Economy in Vietnam: An Interpretation from Organizational Ecology Theory," GLO Discussion Paper Series 181, Global Labor Organization (GLO).

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