Business Friendliness: A Double-Edged Sword

Mengyin Li,Phillip H Phan,Xian Sun

doi:10.3390/su13041819

Mengyin Li, Phillip H Phan + Show 1 more

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https://doi.org/10.3390/su13041819

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Abstract

In this paper, we test the hypothesis that business-friendly local-government policies combined with weak legal institutions lead to lower economic welfare in the form of greater fraud activity. Using data of almost 3000 failed peer-to-peer (P2P) lending platforms in China, labeled as “runaways”, we find that they are more prevalent in provinces with business-friendly policies with weak law-enforcement regimes.

Highlights

Consistent with our hypothesis on the mitigation effect of legal institutions, we find that the strength of law enforcement in a region reduces the positive relationship between business friendliness and the number of runaways
This study examined the association between business friendliness and P2P runaways while exploring the moderating effect of formal and informal institutions
Given the high rate of failure, do depositors still put their money in these entities? We speculate that the P2P phenomenon arose during a period of economic growth in China’s development history, which fosters the tendency for investors’ herd behaviors and willingness to ignore negative information when anticipated returns are extraordinary or even guaranteed, as with many Ponzi schemes [78]

Summary

Introduction

A recent OECD report says that China is in the midst of shifting from an exportoriented (exogenous) economic growth model to a domestic consumption driven (endogenous) model of growth [12]. The same report recognizes China’s increasing focus on sustainable development through its industrial policy of targeting investments in technology, for example, FinTech, electric vehicles, and renewable energy. Chinese policymakers have endeavored to incentivize the growth of domestic credit markets, bank, and nonbank, formal and informal. In the area of nonbank informal credit markets, it has allowed the entry of FinTech startups companies to close the credit gap experienced by microborrowers and those in regions not well served by the big banks. In spite of its support for technology innovation and startups and being the second fastest growing economy in the world (www.worldbank.org.en.country/china/overview), China is not known for its “business friendliness”.

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