Until recently, most local governments in China exercised control over the finances and personnel of local courts, allowing them to interfere with judicial decisions to favor local firms and protect their local tax base. This form of local judicial protectionism can bias the allocation of resources, curb economic integration, and generate considerable welfare loss. Since 2014, China has been gradually implementing a judicial reform that centralizes financial and personnel controls to the provincial level to shield local courts from the influence of local governments. Explicitly billed to improve local business environments, how effective has the reform been in improving judicial fairness and economic integration?  

The data. The researchers compiled administrative data on China’s court verdicts from the government website China Judgement Online between 2014 and 2021 (133 million cases) and business registrations from the records database Tianyancha between 1978 and 2021 (75 million firm registrations). Researchers identified where the plaintiffs were from (local versus non-local) and compared verdicts before and after the reform. Researchers then traced yearly firm investments from business or individual investors to create county-to-county equity investment networks across China over the past four decades to analyze changes in investment patterns before and after the judicial reform. 

Judicial reform reduced local protectionism in judicial decisions. After local governments lost authority over the finances and personnel at local courts, the win rate of local defendants against non-local plaintiffs dropped by 3.3 percentage points, which is a 7.3% reduction from the baseline win rate of local defendants. The decline in local defendants’ win rates was especially large (15.8%) for firms that were politically connected to local governments, suggesting that these firms received more local protection prior to the reform. Together, these results indicate that before the reform, local protectionism significantly distorted judicial decisions in favor of local firms, and the reform corrected this bias significantly.  

Administrative structure of local judiciaries before and after reform  

Quality of judicial decisions improves. The researchers used appeal rates, approval of evidence examination requests, judgment file word count, and discretionary code citations as proxies for the quality of judicial decisions before and after the reforms. Following the reforms, the researchers found that appeal rates decreased by 15.4% for external plaintiffs, while remaining unchanged for local defendants; judges became 24.7% more likely to approve requests for evidence examination and expert witness testimony; court verdicts exhibited 7.5% higher word counts; and judges became 11.2% less likely to cite discretionary codes in judicial reasoning. 

Limitations undermine effectiveness of reform. The researchers find that that firms connected to the (higher-level) provincial and central governments were immune from the removal of protectionism. Similarly, local officials who were connected to the provincial governments also retained some influence over local courts, undermining the effectiveness of the reform. The reform also failed to fully prevent protectionism in inter-provincial lawsuits: inter-county cases within the same province tried in the reformed local courts saw a reduction in the defendants’ win rate of 5.3 percentage points, while inter-provincial cases saw a reduction in win rate of only 1.8 percentage points. Finally, by shifting personnel controls to provincial governments that are less informed about the ability of local judges, the reform led to the promotion of less capable judges.  

Local defendants’ win rate and external investment 

Decreased local protectionism could boost economic growth across China. When a local court underwent the reform, inward equity investment from non-local business investors increased by 11.2%. This effect was most pronounced among firms involved in lawsuits post-reform and in regions adopting the reform in later years, which is consistent with investment responses being driven by firms’ awareness of the reform’s effectiveness. A decrease in joint ventures between non-local firms and local partners suggests that the reform also reduced transaction costs for non-local firms, making direct market entry more viable without having to seek legal protection by integrating with powerful local partners. Researchers estimated that improved cross-regional integration resulting from nationwide implementation of the reform could boost China’s GDP by up to 1.9% and increase annual cross-country investment by over $200 billion in registered capital.

Judicial centralization, not complete judicial independence. Taken together, the researchers emphasize that, while effective in reducing local protectionism and promoting economic integration, consolidating judicial controls to provincial governments does not fully decouple the judicial and executive branches of the  government, especially at higher levels. The reform is thus better categorized as a move toward rule by law, rather than rule of law — meaning the law is used by top leadership as a tool of governance that does not place checks on their own authority. The provincial and central governments could therefore remain influential in the judicial process, giving rise to side effects that undermine the economic upsides of the reform.