Ginis hypothesizes that increasing production complexity has changed the strategic interaction between states and firms regarding extraction of firms’ assets. For states, production complexity creates opportunities to extract assets from firms in less visible ways. For firms, production complexity can allow firms to protect themselves from extraction by the state by increasing the costs of extraction and, at the extreme, expropriation. By increasing production complexity—for example by fragmenting the production process across states or contracting inputs informally—firms can obfuscate their assets and thus protect themselves from state extraction. Where property rights are uncertain, making the production process less legible to the state increases the costs of seizing and repurposing assets. Firms therefore may have incentives to maintain complexity even when it is inefficient, in order to make extraction and expropriation less attractive. The implication of this strategic interaction is that firms’ incentive to protect themselves by maintaining production complexity can lead to inefficient behavior that slows economic growth. In other words, uncertain property rights not only decrease the possible benefits of industrial upgrading for firms, but also increase the costs.
