The Feldstein-Horioka puzzle and law

In this paper, we introduce a proxy for the legal protection of investors, a dummy variable that indicates legal origins, into the Feldstein and Horioka (1980, Economic Journal 90) saving-investment regression. The estimations show that in the French-civil-law countries, which have the weakest investor protection, the domestic investment rates are generally less strongly correlated with the domestic saving rates. This implies that in countries with less investor protection, the capital resulting from an increase of domestic saving tends to flow to foreign countries with stronger investor protection, rather than into domestic investment.