Firm Growth and Political Institutions

Using a large sample of 115,534 firm-year observations from 46 countries over the period 1992 to 2007, we investigate the impact of political institutions on firms’ growth. We find that high levels of political constraint spur firms’ growth and that this positive impact is more pronounced in poor legal environments. Our results are economically significant and are robust to alternative measures of firms’ growth, various proxies for political institutions, additional controls, alternative periods, and firm-level and country level regressions. Our findings have broad implications for governments and policymakers. Specifically, our results suggest that reforms aimed at improving political institutions in the country can significantly impact firms’ growth and expansion. The weak impact of legal institutions on firms’ growth when political constraints are at high levels suggests that it is indeed through improved political institutions that incentives to grow are channeled to firms.