PROPERTY RIGHTS , FINANCE , AND ENTREPRENEURSHIP Simon Johnson

Is investment constrained more by insecure property rights or by limited external finance? For five transition economies in Eastern Europe and the former Soviet Union we find that weak property rights limit the reinvestment of profits in startup manufacturing firms. Access to credit does not appear to explain differences in investment. At least in the early stages of post-communist reform, retained earnings appear to have been enough to finance the investments that managers wanted to make. JEL Classification: M13, P30 John McMillan Stanford University Graduate School of Business Stanford, CA 94305-5105 USA email: [email protected] Christopher Woodruff University of California, San Diego Graduate School of International Relations and Pacific Studies La Jolla, CA 92093-0519 USA email: [email protected] Simon Johnson MIT Sloan School of Management Cambridge, MA 02138 USA Email: [email protected] Property Rights, Finance, and Entrepreneurship Simon Johnson, John McMillan, and Christopher Woodruff Is investment constrained more by insecure property rights or by limited external finance? For five transition economies in Eastern Europe and the former Soviet Union we find that weak property rights limit the reinvestment of profits in startup manufacturing firms. Access to credit does not appear to explain differences in investment. At least in the early stages of post-communist reform, retained earnings appear to have been enough to finance the investments that managers wanted to make.