Effects of rule of law on firm performance in South Africa

Abstract

Purpose

South Africa (SA) has undertaken significant institutional reforms since the change in its political regime in 1994. During the same period, SA has also experienced rapid economic growth. Although it is widely accepted that institutional reform generally has positive impacts on firm competitiveness and economic growth, the extent to which institutional reforms in SA have been of benefit to businesses is not well understood. The purpose of this paper is to focus specifically on the rule of law and assesses the extent to which the rule of law affects business performance.

Design/methodology/approach

The study uses multinomial logistic regression techniques and data, from a large‐scale firm level survey (n=751) of SA businesses undertaken by the World Bank in 2007, to estimate the effects of various elements of the rule of law on firm performance.

Findings

Crime and theft were found to have the largest impact on business performance, followed by corruption and tax administration. Political instability and the effectiveness of the court system were not perceived to affect business performance significantly.

Research limitations/implications

Ongoing institutional reforms aimed at improving business performance and competitiveness in SA should pay particular attention to the design of effective policies to address crime, theft, corruption and tax administration issues faced by businesses.

Originality/value

The study is one of the first to provide empirical evidence based on a large‐scale survey of the extent to which crime and theft, corruption and tax effectiveness inhibit business growth in SA.

Citation

Roxas, B., Chadee, D. and Erwee, R. (2012), "Effects of rule of law on firm performance in South Africa", European Business Review, Vol. 24 No. 5, pp. 478-492. https://doi.org/10.1108/09555341211254544