Omnia Juncta in Uno: Foreign Powers, Institutions, and Firms in Shanghai's Concession Era

Abstract: In this project we investigate the influence of institutions on industrial and firm growth by exploiting the unique historical context in Shanghai, China, during the late 19th and early 20th century. While there is a general consensus in the current literature that institutions are important for economic growth, the empirical assessment of this question has traditionally relied on comparing countries with different institutions to each other and over time. We aim to contribute to our understanding on institutions and economic growth by looking at the growth of firms that are subject to different institutions, but are located within the same city, and therefore share the same geographic amenities. Historical Shanghai provides an intriguing context for studying our research question. First, there is variation in the legal framework in which different firm operate, because a number of foreign nations were granted extraterritorial power, which meant that firms of these nations were tried by consular courts following laws of their own nations, instead of Chinese law. Due to (arguably exogenous) geopolitical reasons, certain countries were added/deleted from the list of nations that enjoyed extraterritorial status. Second, there is variation in local governance and regulation, as the city was divided into geographical segments that shared similar natural advantages but were ruled by distinctively different institutions including most prominently the International Settlement and the French Concession. We compiled a newly digitized dataset on firms in Shanghai between 1872 to 1941, covering firm level characteristics such as their specific location, industry and nationality, as well as outcomes related to key employment, employee nationality, trade, and firm organization. This provides us with a unique context to estimate the economic influence of different legal institutions and local governance on firm growth.