‘Does Law Matter? A Natural Experiment using Corporate Governance in Indonesia and Malaysia’

The question, “does law matter?” reflects a fundamental concern of whether law is worth the attention and investment of public authorities. Often implied in the discussion is that other institutions, whether markets or informal established social practices, are preferable methods for organizing the economy and may well do a better job of satisfying individual needs. This paper investigates the proposition that law does matter even in the Asian context where strong informal social practices persist by examining the corporate law of two very similar countries — Indonesia and Malaysia — that have such social practices. Using these two countries allows us to control for non-legal factors that greatly influence economic performance to provide evidence of whether law matters. Using empirical methods, we find that adoption of laws consistent with OECD Principles of Corporate Governance substantially contributes to a jurisdiction’s economic performance