A “de Soto Effect” in Industry? Evidence from the Russian Federation

Abstract: The strengthening of land rights has become one of the most widely discussed policy prescriptions for reducing financial market frictions and promoting private investment in low and middle income countries. But empirical assessments of these potential effects have produced only mixed results. One important reason, we feel, may be that the existing literature has focused exclusively on actors that face difficulties accessing credit for reasons that transcend the security of land tenure. That is, although strengthening the land rights of small-scale farmers or poor urban households might be necessary for increasing credit access and promoting investment, it might not be sufficient. We thus explore the effect of greater tenure security over land in a setting in which non-land-related financial market frictions are apt to be less severe – i.e., among large, urban, industrial enterprises. Exploiting policy variation in the pace of land privatization across Russian regions, we use recent, firm-level survey data to show that private rights to land do indeed facilitate access to external financing and promote investment. We supplement this finding with direct survey evidence of firms’ managers pointing to private land as an important source of collateral to secure external loans.