INTRODUCTION

How do complex, nontransparent laws and regulations and a somewhat inaccessible, expensive, and slow set of formal legal conflict resolution mechanisms affect business transactions? This study uses the approach of the new institutional economics (NIE) to contrast the impact of the complex legal and regulatory environment in Brazil with that in Chile, where regulatory and legal reforms have sought to facilitate market efficiency. In addition, the study examines the importance of legal and regulatory obstacles to the growth and operation of Brazilian businesses relative to other constraints. The results illustrate a central point: institutions matter economically in the actual costs (and benefits) they create for businesses, not in their compliance with ideal forms.

The study examines four basic areas where legal and regulatory institutions could create critical obstacles to efficiency:

• the start-up of a new business (entry);

• the regulation of business;

• orders by customers; and

• sales with credit.

The first two areas involve transactions between a business and the government, while the second two involve transactions between businesses. Interviews with garment firms were used to ascertain in as quantitative a way as possible the costs and problems associated with particular transactions.

The results show that Chilean business transactions indeed benefit from legal simplicity and consistency of enforcement relative to their Brazilian counterparts, but these benefits are mitigated by the differences between formal law and the law in practice in Brazil.