Property rights are core pillars of economic systems, influencing investment decisions by providing legal assurances that ownership will be protected and respected. However, questions remain about their specific relationship with economic outcomes. Helping to answer these questions, Allen H. Huang of HKUST and two colleagues investigate the importance of property rights protection for private firm investment, offering important insights for regulators and policymakers.

As strong property rights constrain governments’ ability to arbitrarily seize private property for public use, known as expropriation, they should encourage firms to invest. However, studies have reached mixed conclusions on this front. “It is unclear whether attempts to strengthen property rights can sufficiently alleviate expropriation risk and lead to economically meaningful differences in real outcomes,” the researchers tell us.

To resolve this confusion, they use the enactment of China’s 2007 Property Law to study the effects of a property rights reform on corporate investment. “We choose this setting because the Law effectively reduces firms’ perceived government expropriation risk by formally granting legal protection to private property rights,” they explain.

The findings of the study unfold a compelling narrative of the impact of the 2007 Property Law on investment and economic vitality. By significantly reducing expropriation risk for private firms, the law instilled a newfound confidence in investors, leading to a substantial increase in both domestic and foreign investment. This surge in investment was not just a reflection of corporate behavior; it translated into tangible economic benefits, including higher local GDP per capita and increased employment.

“By documenting new evidence showing that strengthening property rights institutions can improve firms’ investment decisions and promote economic growth,” the researchers conclude, “our article has important implications for regulators and policymakers.” This may be especially true for developing countries.