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THE IMPACT OF THE LAW SUBMISSION COSTS ON INVESTMENTS

Автор Доклада: 
Blaga M.
Награда: 
THE IMPACT OF THE LAW SUBMISSION COSTS ON INVESTMENTS

THE IMPACT OF THE LAW SUBMISSION COSTS ON INVESTMENTS

Mariia Blaga, master student
BI Norwegian Business School

The investments into the economy to a great degree depend on the legal sphere. In the article the consideration is given to the concept ‘costs of formality’. The article characterizes the quantitative and qualitative impact of the law submission costs on the investment process, which is presented as a model. As a result of the analysis, the author infers the presence of substantial significant effect of formality costs on the investment climate, expressed as an inverse dependence. Hence the reduction in law submission costs will attract new foreign and national investments, and thus will assist economic growth.
Keywords: transactional costs, costs of law submission (costs of formality), costs of informality, investments, investment climate.

Many different factors influence investment decisions. Among them a significant place is occupied by the legal system and level of transaction costs related to activities within the law.
The most acceptable way of exploring the impact of transaction costs on investment is the classification of Hernando de Soto. According to it transaction costs are divided into costs of formality (law submission costs) and costs of informality, which are seen as complexes of transaction costs connected with doing business in the legal or illegal sector. Different aspects of analysis of transactional costs essence and their influence on activity of enterprises and economy in general were also researched by Ronald Coase, Oliver E. Williamson, Michael C. Jensen, Douglass C. North, among Ukrainian scientists – S. Arkhiiereiev and T. Kuznetsova.
The author aims to determine the impact of the law submission costs on investments.
Costs of formality are connected with the necessity of paying taxes, compliance with labor relations law, paying court fees in dealing with conflicts within the legal judicial system and so on. Also it should be noticed that the charges of law submission consist not only of charges in a money form but also of time costs on implementation of different procedures. De Soto divides the cost of law submission into the cost of access to activity and continuation activity cost in the proper institutional environment. [1] However the concept of activity completion costs within the framework of law should be included in this classification. It would characterize transactional costs, related to stopping of activity and to liquidation of enterprises. [2] Nevertheless the need for spending in legal sector encourages people to act beyond the law, which leads to existing of informality costs. [1]
Hence, it is evident that formality costs influence general economic situation in the country and firms decision-making processes. And first of all it influences investment climate of the country.
The concept of investment climate includes variety of different factors. For the purpose of this research all these factors were divided into four categories:
1. Financial and economic;
2. Regulatory and legal;
3. Political;
4. Social and psychological.
Therefore, the law submission costs actually are procreated by regulatory and legal factors, which are components of the investment climate. Thus, costs of formality make a significant influence on the investors’ decision whether to invest or no into the economy of some country.
Regulatory and legal factors often affect the financial and economic parameters (factors), establishing conditions and rules of economic agents’ operations at the micro level and the economy in general. These components of investment climate create charge of transaction costs and reduce the efficiency of the capital. Their value reduces beneficial effect, which the company tends to obtain as a result of its operation – profit (this reduction cannot be fully seen because most of the transaction costs are not considered by accounting and forecasting). However any investor wants to avoid extra costs, if possible and he has such an opportunity because of many countries with different regulatory and legal characteristics. Thus, increasing formality costs reduce investment attractiveness of a country or region and thereby investments.
The study uses data about 143 countries and methodology for measuring business regulation «Doing business 2009» and World Bank to provide the quantitative analysis of the law submission costs’ impact on the investments [3; 4; 5]. As a dependent variable the net inflows of foreign direct investment (BoP, current US$) were used and twelve indicators, which describe all components of formality costs, were used as independent ones [3; 4]:
1) the cost of access to activity: time (days) and cost (% of income per capita) of starting a business, time (days) and cost (% of property value) of registering property;
2) the continuation activity cost: investor protection index, time (hours per year) of paying taxes, tax payments (number per year), total tax rate (% profit), time (days) and cost (% of claim) of enforcing contracts;
3) the completion activity costs: time (years) and cost (% of estate) of resolving insolvency.
After the correlation-regression analysis such model was obtained:
у = -12,72 + 993,16 / х2 + 369,695 / х3
where:
у – foreign direct investment, net inflows (billions of current US $);
х2 – paying taxes, time (hours per year);
х3 – enforcing contracts, cost (percentage of the claim).
This model is correctly specified, adequate and significant. Generally there are no violations of assumptions about normality and homoscedasticity, no residual autocorrelation and multicollinearity. The coefficient of determination is 18.65%, which could be explained by the fact that this research is based just on one group of factors.
The growing burden of transaction costs (costs of formality) significantly reduce the flow of foreign investment into the country, which in turn leads to slowing of economic growth. The model shows that the two components for the law submission costs determine almost 20% of investors’ decisions. Obviously, for different groups of countries other components of formality costs are also more or less significant.
Hence, creating an investment climate, and wish to attract new investments, especially in modern conditions, countries need to offer better conditions for investors, which could reduce submission costs. Besides, they should not forget that the costs of formality do not only influence the investment decisions of foreign investors, but also the decisions of domestic economic agents. Thus, decreasing the law submission costs will attract new foreign and national investments, and will assist economic growth consequently.

Literature:

  • 1. Hernando de Soto (1989) The other path: the invisible revolution in the Third World. New York.
  • 2. Blaga M. (2011) Costs of law submission: components and their description. Modern trends in scientific thought development: Materials Digest of the 2nd International Scientific and Practical Conference – Economic sciences. Ukraine, UK, USA.
  • 3. Doing Business 2009: Measuring Business Regulations / WB Global Report 2009 – 20.10.2011: http://doingbusiness.org/reports/global-reports/doing-business-2009]
  • 4. Methodology / Doing Business 2009: Measuring Business Regulations / WB Global Report 2009 – 20.10.2011: http://doingbusiness.org/methodology
  • 5. Foreign direct investment, net inflows (BoP, current US$) / The World Bank Data – 20.10.2011: http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD]? 
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