Similarly, if rules are changed frequently or unexpectedly, they lose credibility. The wider the discretionary controls of politicians and bureaucrats, the greater the opportunities for bribery. In these circumstances, noncompliant behavior may be the most efficient way to operate. Governments with poor records in enforcing law and order can soon ruin even a thriving economy. If such countries attract investors, it is into areas that the state cannot afford to develop on its own.
International investors can stay away from states perceived to be incompetent and corrupt.
Local business communities cannot. They must operate within the system, with all its faults, or not operate at all. The credibility of the state in the eyes of local entrepreneurs has a direct bearing on economic performance. They invest less and operate less efficiently than they would in a more supportive policy environment. The main reason for this underperformance is that, to survive, they must divert time and money from their businesses into negotiations with bureaucrats and unreliable institutions.