What role do court rulings play in attracting foreign investment under authoritarian regimes? While scholars often point to strong property rights and EU-style courts, such constraints rarely emerge directly from judicial institutions in these settings. Without reliable accountability, foreign investors must continually assess whether conditions favor their entry. In this project, I built a model that highlights an underexplored informational function of the court system. Lawsuits can reveal broader risks of expropriation. Anticipating this, policymakers may strategically enact systematic judicial reforms or implement temporary measures to signal their commitment to protecting market interests.

In the equilibrium, thorough reforms are most likely where the local economy’s export reliance is moderate and investors worry most about judicial expropriation. Moreover, while negative economic shocks prompt changes in the judicial system to attract FDI, only systematic reforms yield genuine quality improvements. Temporary interventions tend to be more superficial. Using a staggered difference-in-differences approach and multiple datasets from China, the evidence shows that as trade losses increase, local judicial favoritism declines, reflecting rising demand for foreign business and the heightened value of court rulings as information. Judicial reforms are implemented most extensively in provinces moderately reliant on U.S. markets. Improved judicial quality only materializes in areas undergoing comprehensive reforms; mere temporary interventions do not suffice. Additionally, following trade shocks, judges are more likely to favor foreign plaintiffs, signaling a pro-market stance that supports the hypothesis: cases offering better informational value to foreign investors are more likely to result in impartial rulings.