Perry, W. Tyler | February 17, 2016

The dominant strain of law and development theory holds that strong property rights are a necessary condition for economic growth. Nonetheless, China has experienced thirty years of frenetic growth absent strong property rights. This Note explores this phenomenon through an analysis of a unique corporate form that has come to underlie most of the publicly traded Chinese Internet sector—the Variable Interest Entity (VIE). The VIE is, at its core, a series of contracts designed to mimic “true” ownership. As such, the VIE problematizes law and development theory in two primary ways. First, the contract-based ownership system does not provide the clean title envisioned by most law and development theorists, and consequently raises issues related to control. Second, the ownership claim of the investor is likely judicially unenforceable. Accordingly, the increasing prevalence of the VIE structure and the simultaneous economic growth enjoyed by China’s Internet sector naturally leads to a number of interrelated conclusions. First, the VIE shows that weak property rights may be sufficient in situations where they nonetheless provide notice of who “owns” the particular item at issue (i.e., it serves a title-clearing function). Second, culturally specific, extralegal institutions and methods may vindicate rights in the absence of the rule of law. Third, predictability, an implicit purpose of the property rights regime, may allow for economic growth absent strong property rights. Read together, these three conclusions suggest that the academy has taken a good idea—the almost universal emphasis of rule of law and property rights—and stretched it beyond the confines of its natural universe.