Trust in Commercial Courts and Its Effect on the Performance of Ukrainian SMEs

Abstract

A set of data from a survey of 285 small and medium-sized manufacturing enterprises from the three regions of Ukraine with the highest concentration of SMEs is used to study the determinants of trust in the contract-enforcing powers of commercial courts and its impact on the performance of firms. It is found that trust in courts has a significantly positive impact on the performance as measured by growth in sales and labor productivity. Several determinants of trust in courts are identified: entrepreneurs' experience of direct administrative corruption in the form of monetary bribes, informal relations between businessmen and public officials based on mutual trust, and perceptions of the general business environment. There is, moreover, a significant learning effect: Businessmen with positive experience with commercial courts are more trustful than their inexperienced fellow managers. When testing for direct effects of corruption, informal relations, quality of business environment and past experience with courts on performance no significant quantitative relationships are detectable. This is evidence in favor of the basic hypothesis that these institutional factors influence the performance of SMEs indirectly via their impact on the entrepreneurs' belief in the ability of the legal system to protect their property rights.