_14_ _The New Comparative Economics_ Some of the initial evidence on transplantation<sup>of legalsystems,assembled by La Porta et al.</sup> (1997, 1998), strongly supports this hypothesis.<sup>Theauthorslook at thelaws governingthe protection of</sup> investors - shareholders and creditors<sup>-fromexpropriationby corporateinsiders usinga sampleof 49</sup> countries around the world. They find<sup>that, generally speaking,commonlaw countriesprotect</sup> shareholders better than do civil law countries,<sup>and especially Frenchcivil law countries.They also find</sup> that common and German civil law<sup>countries protect creditorsbetter than do the Frenchcivil lawcountries.</sup> La Porta et al. (1997, 1998) and subsequent<sup>studies alsoshow that bothlegalorigin andinvestor</sup> protection are strongly correlated with<sup>various aspects of financialdevelopment (Demirguc-Kuntand</sup> Levine 2001, Johnson et al. 2000, Wurgler<sup>2000, Beck et al.2003a,b, Friedman,Johnson,andMitton</sup> 2003, La Porta et al. 2000, 2002).

Djankov, La Porta, Lopez-de-Silanes,<sup>and Shleifer(2002, 2003)and Botero et al.(2003)take</sup> these cross-country comparisons further<sup>by examining variousdomainsof government regulation,</sup> including entry by new firms, judicial<sup>proceduresin courts,and labor markets.Although the data for each</sup> of these studies were collected using different<sup>proceduresand theycover somewhat different samples of</sup> countries, some systematic patterns emerge.<sup>Countries appear to have pronouncedstylesof socialcontrol</sup> of business intimately related to the legal<sup>origin of their laws.Inall three areas -entry,courts,and labor -</sup> socialist and French legal origin countries<sup>regulate much more heavily than do the commonlaw countries.</sup> On average, the very same countries that<sup>regulateentry,also regulatecourts and labor markets,and that</sup> these correlations are at least in part<sup>drivenby legalorigin(see Table1).</sup>

# **Table I**

# **Correlations between regulation measures**

The table shows the pairwise correlations<sup>of regulationindices across 63countries.No forrner or current communist</sup> countries are included to avoid spurious correlation.<sup>Themeasures of regulationare:(1) "Employmentlawsindex"</sup> which measures the level of protection of labor<sup>andemploymentlaws and is formed by thenormalized sumof:(i)</sup> subindex: alternative employment contracts.<sup>(ii)subindex:conditions of employment.(iii) subindex: job security; (2)</sup> "Number of procedures to start a business;"<sup>whichis defined as the number of different procedures thata start-up has</sup> to comply with in order to obtain a legal status,<sup>i.e.,tostart operatingas alegalentity; and (3)"Court formalism</sup> index for the collection of.a bounced check"<sup>whichmeasuressubstantive and proceduralstatutory interventionin</sup> judicial cases at lower-level civil trial courts,<sup>andis formed by variouscharacteristicsin the process such as the need</sup> for lawyers and legal justifications<sup>in</sup> the<sup>process, writtenvs. oral elements,statutory regulationof evidence,control</sup> of superior review, engagement formalities<sup>for the parties,and thenumber of independentproceduralactions.</sup>

|Employmentlawsindex|Numberofproceduresto<br>startabusiness|
|---|---|
|Numberofprocedurestostarta||
|business<br>0.6168a|1|
|Courtformalism indexforthe||
|collectionofbouncedcheck<br>0.6083a|0.5944a|

a=significant at I percent level; b=significant<sup>at 5 percentlevel; c=significantat10 percentlevel.</sup> Sources: "The Regulation of Labor," Harvard<sup>Universitymanuscript,November2002(Botero,Djankov, LaPorta, Lopez-de-Silanesand Shicifer);</sup> "The Regulation of Entry," Quarterly<sup>Joumalof EconomicsCXVII,February2002,1-37(Djankov,La Porta, Lopez-de-Silanesand Shleifer);</sup> "Courts," Quarterly Joumal of Economics,<sup>forthcoming 2003,(Djankov,LaPorta,Lopez-de-SilanesandShicifer).</sup>