Rule-of-Law Deficit and Expropriation Fear
Observational StudyReview
Weak judicial systems and poor legal protections in developing countries prevent business owners from delegating decision-making autonomy to non-owner managers due to fears of unpunished theft and contract violation.
Picture this
If a store owner knows the local courts will not prosecute an employee who runs off with the register cash, the owner will insist on standing at the register all day rather than hiring a manager to run a second store.
What the evidence says
Developing nations with weak legal enforcement display near-zero delegation of employment, capital investment, and pricing decisions compared to developed nations where plant managers independently approve up to $50,000 in capital expenditures.
- Who was studied
- Cross-country double-blind survey of 6,000 medium-sized manufacturing firms (100 to 5,000 employees) across the US, Western Europe, Japan, Brazil, China, and India.
- How
- Cross-country organizational survey (BSVR) linking decentralization scores with country-level legal enforcement metrics.
What to do
Design internal financial auditing and inventory tracking systems to reduce monitoring costs and theft risks prior to delegating managerial authority.
From the source
"One is poor rule of law, as the owners typically fear that managers will steal from them if given greater autonomy, and they will not be able to punish them without an effective legal system."
Why Do Firms in Developing Countries Have Low Productivity?