Judicial Independence and Domestic Supply Chain: Evidence from a Quasi-Natural Experiment

Abstract

How to effectively break down market segmentation and build a sustainable and unified domestic market has become critical to achieving high-quality development in the Chinese economy nowadays. This study examines the effects and mechanisms of improved judicial independence on the development of larger and more sustainable domestic supply chains, using a sample of Chinese enterprises from 2011 to 2016 and a quasi-natural experiment of local judicial reforms. We find that, after the establishment of local circuit courts, the distribution distance of a firm’s supply chain increases significantly. The mechanism analysis suggests that the increase in distribution distance in the domestic supply chain is due to the breakdown of market segmentation resulting from the reduction in local judicial protectionism and the improvement in the quality of local justice after the establishment of circuit courts. Further tests show that the impact of improved judicial independence on the domestic supply chain is most pronounced among small and manufacturing non-state-owned enterprises and those from less competitive industries. Overall, the findings of this paper provide important insights into developing large and sustainable supply chains via breaking down market segmentation, thereby promoting long-term economic growth.