Corporate law and economic development

Abstract

This chapter examines some of the larger issues generated by the voluminous literature on the relationship between corporate law and economic development thereby contributing to a greater understanding of that relationship and to potential areas for future research. The chapter begins with corporate law’s role as a form of investor protection. Stronger investor protection is thought to make it more likely that people will invest and thus increases the amount of capital available for business which in turn facilitates economic growth. However, embedded within this are many questions that merit further discussion. For example, is it better corporate law that causes growth or vice versa? Much of the literature suggests that the relationship is not so unidirectional. Another question is, assuming enhancements in corporate law cause changes in investment, are those changes always increases in investment or might they be decreases too? For example, firms might seek less equity capital if they thought the costs of investor protections were too onerous or, perhaps, investment via the formal sector might increase, but informal sector investment might decrease by more. There is little study on this central issue in most emerging markets, yet related research on enhancing creditor protections suggests that both increases and decreases in investment are possible. Further, even assuming increases in overall investment, we could ask what parts of corporate law trigger this and do the effects differ depending on ownership structure, industry, jurisdiction or something else? The literature provides some guidance, but as with many things in corporate law, much depends on context. Yet another important question is whether the law per se matters, or is it the likelihood of its enforcement, or whether the law allows parties to contract around it, or how the law is interpreted by a (sophisticated) judiciary, or what signals its sends about a country’s general business environment? The existing literature begins to tackle some of these questions, but there is still much unexplored terrain. Finally, the chapter discusses other roles of corporate law – such as its asset partitioning role and the current debate over the corporation’s purpose – and briefly addresses some implications that they may have for the interactions between corporate law and economic development. The chapter concludes by noting that although the literature on corporate law and economic development is vast, there remain many questions that can be fruitfully explored in future research.