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Relationships and Institutions

Relationships between firms often involve actions which put one party or the other at risk. Firms need some assurance that the obligations of their trading partners will be met. A well functioning legal system may provide that assurance. With this in mind, developing and transition countries are reforming legal systems at a rapid pace. But court systems which efficiently serve the needs of businesses take time to establish. When asked how long it would take Latin American countries to establish effective legal systems, the head of Microsoft’s Latin American legal department once responded: “A generation.” Must firms in developing and transition countries wait a generation? Or can even an imperfect legal system provide them some protection? In this paper, we use data from surveys of manufacturing firms in Eastern Europe to attempt to shed some light on these questions. We asked managers about relationships with specific trading partners. They described relationships of varying complexity. Some sales are cash and carry, others involve some delay in payment. Some goods are produced to order, others are produced for inventory. In establishing and monitoring these relationships, firms sometimes used information other cases they did not. Some of the managers surveyed expressed confidence that available legal systems could enforce contracts with trading partners; others expressed a lack of confidence in the courts.