Explaining the performance of firms and countries: What does the business environment play?

Abstract

It is commonly accepted that the business environment - encompassing features of the legal, regulatory, financial, and institutional system of a country - has an impact on the performance of firms. As barriers to doing business appear to vary widely across regions and countries, it has also been asserted that the business environment will affect aggregate performance. The common underlying assumption is that countries and firms facing "better" business environments can be expected to perform better This paper attempts to evaluate the robustness of these conclusions using two types of data. The first comprises a large firm level dataset - the 2002 and 2005 rounds of the Business Environment and Enterprise Performance Survey (henceforth BEEPS) - that includes measures of firm performance, variables relating to ownership, competition and export orientation as well as perceptions of the business environment. The dataset covers between 6–9,000 firms in 26 transition countries. The second - country level - dataset comprises the World Bank's annual "Doing Business" survey that covers 175 countries. While this survey has relatively few observations over time - data collection only started in 2003 - it has large country coverage and has already been widely used in cross-country analysis. In this paper, the Doing Business measures are primarily used to try and establish whether there is any link from country-level measures of the business environment to country-level performance. Simon Commander - Associate Professor, Department of Public Administration, School of Management, St. Petersburg State University Jan Svejnar - Professor, University of Michigan, Katrin Tinn - Assistant Professor, Stockholm School of Economics