This study examines the dynamic impact of legal system and property rights (LSPR) institutions on investment and entrepreneurial activity across countries with varying income levels. By analyzing how institutional improvements influence economic behavior over time, this research aims to provide insights into the role of LSPR in fostering sustainable economic development, particularly in developing economies.
The study utilizes a fixed-effects dynamic panel regression model with lagged dependent variables to assess the short and long-term effects of LSPR on investment and entrepreneurship. By conducting separate analyses for low, lower-middle, upper-middle, and high-income countries, the study provides a nuanced perspective on how LSPR influences economic outcomes across different stages of development. To ensure the validity of the findings, robustness checks are also performed.
The results reveal that improvements in LSPR lead to an immediate and sustained increase in investment, whereas entrepreneurial responses emerge with a delay, suggesting a gradual adaptation to institutional changes. The impact is most pronounced in low-income countries, where stronger LSPR institutions significantly enhance both investment and entrepreneurship. In contrast, high-income countries, already equipped with well-established legal and property rights frameworks, exhibit minimal responsiveness. These findings underscore the critical role of institutional development in driving economic growth, particularly in developing nations.
This study is subject to several limitations. The LSPR index primarily captures formal legal protections and may not fully reflect informal institutions or regional disparities. Data gaps and reporting inconsistencies across countries also constrain comparability, particularly in entrepreneurship measures. While robustness checks strengthen confidence in the results, potential endogeneity and unobserved shocks cannot be fully ruled out. Despite these limitations, the findings underscore the critical role of institutional reforms in fostering investment and entrepreneurship, especially in low- and lower-middle-income countries. Policymakers should tailor institutional strengthening strategies to developmental stages for more inclusive and sustainable growth.
The findings highlight that strengthening LSPR can significantly enhance investment and entrepreneurship, particularly in low- and lower-middle-income countries. Policymakers should prioritize judicial independence, contract enforcement, and secure property rights to create predictable business environments. For upper-middle- and high-income economies, complementary measures such as innovation incentives, regulatory streamlining, and trade integration may be necessary to sustain growth. Development agencies and governments should design stage-specific institutional reforms that not only attract capital and foster entrepreneurship but also ensure inclusive participation and long-term economic resilience.
Strengthening LSPR extends beyond economic benefits to broader social outcomes. Secure institutions reduce uncertainty, foster trust, and promote fairness by safeguarding private assets and minimizing arbitrary state intervention. In low-income contexts, reforms can encourage the formalization of businesses, creating jobs and widening access to economic opportunities. Over time, inclusive institutional frameworks can reduce inequality, empower marginalized groups, and enhance social stability. By ensuring that entrepreneurship and investment are driven by transparent and equitable rules, stronger LSPR institutions support not only growth but also more cohesive, resilient, and inclusive societies.
This study advances the literature by analyzing the dynamic effects of institutional changes, particularly property rights, on entrepreneurship and investment. Unlike existing research that primarily examines static relationships, this study captures immediate and long-term impacts, highlighting how these effects vary across countries at different income levels. The findings provide valuable insights for policymakers seeking to enhance investment, foster entrepreneurship, and drive sustainable economic growth through institutional reforms.
