How the Interaction Between Formal and Informal Institutional Constraints Determines the Investment Growth of Firms in Egypt

Abstract

This study examines important issues regarding the effect of the legal system and financial institutions on the economic activity of private firms in Egypt. These are reviewed in the context of the interaction of formal and informal institutional constraints. The study shows that this effect is more complex than it is reported to be by the current literature. Moreover, it demonstrates that this effect is determined by the type of relationship there is between formal institutions like legal systems and informal institutions such as corruption and cronyism. Furthermore, corruption (and cronyism) could, in the short run, substitute for the deficiencies of formal institutions like the legal system and help improve investment growth of firms. However, this is not sustained in the long term and it appears that corruption could negatively affect this economic activity through its deteriorating effect on the enforcement mechanism of the legal system and financial institutions. This study contends that more focus on commitment-enhancing institutions should be taken first to support reformed legal and financial institutions. The article concludes with organizational and managerial implications, hence solidifying the link between the law, and economic and organizational analysis.