Local governance quality and law compliance: The case of Mozambican firms

In sub-Saharan Africa, many micro and small enterprises do not (or at least only partially) comply with official rules and regulations. Given that low compliance rates impede economic growth and human development, it is essential to identify mechanisms that can help improve abidance with laws. This paper investigates how the quality of governance (defined as comprising three dimensions: transparency, legal security and infrastructure quality) is related to firm-level compliance with business laws and regulations in the case of Mozambique. We utilise firms’ subjective perceptions of governance quality and their self-reported law compliance over time to study the governance–compliance nexus, taking into account unobserved firm-level heterogeneity. Furthermore, we examine whether political legitimacy acts as a mediator or a moderator between governance and compliance. Our results suggest that perceived improvements in transparency positively affect firms’ compliance with existing legislation. Requests from provincial government officials for firms to comment on local regulations seem to be especially important for law abidance. We find that legitimacy is independently associated with compliance, but does not seem to mediate or moderate the quality of governance. Overall, our results suggest that, even in one of the least developed and non-democratic parts of the world, active participation in political processes is positively associated with law compliance. Using panel data of manufacturing enterprises in Mozambique between 2012 and 2017, we investigate how changes in perceived quality of governance are related to firms’ law compliance.Controlling for firm-level unobserved heterogeneity, we look at three aspects of governance and their components: transparency, security, and infrastructure. We examine which of these have thepotential to alter firm compliance behaviour. We find that enterprises’ perceptions of transparency are key to law abidance. In particular, higher predictability of changes in the law, better access tolegal documents, and regular meetings with state officials improve firm compliance rates. Thus, we confirm results showing that more political participation and government openness increasecompliance with regulations, even in a non-democratic context. Additionally, we test whether political legitimacy acts as a mediator or a moderator in this governance–compliance relationship,but find no clear evidence of this being the case. However, we do confirm that legitimacy has an independent effect on firms’ compliance with regulations in the context of Mozambique.