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Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations Across Firms

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Author Info

  • Aterido, Reyes

    ()
    (World Bank)

  • Hallward-Driemeier, Mary

    ()
    (World Bank)

  • Pagés, Carmen

    ()
    (Inter-American Development Bank)

Abstract

Using firm level data on 70,000 enterprises in 107 countries, this paper finds important effects of access to finance, business regulations, corruption, and to a lesser extent, infrastructure bottlenecks in explaining patterns of job creation at the firm level. The paper focuses on how the impact of the investment climate varies across sizes of firms. The differences across size categories come from two sources. First, objective conditions of the business environment do vary systematically by firm types. Micro and small firms have less access to formal finance, pay more in bribes than do larger firms, and face greater interruptions in infrastructure services. Larger firms spend significantly more time dealing with officials and red tape. Second, even controlling for these differences in objective conditions, there is evidence of significant non-linearities in their impact on employment growth. The results suggest strong composition effects: A weak business environment shifts downward the size distribution of firms. In the case of finance and business regulations this occurs by reducing the employment growth of all firms, particularly micro and small firms. On the other hand, corruption and poor access to infrastructure reduce employment growth by affecting the growth of medium size and large firms. With significant differences between firms with less than 10 employees and SMEs, these results indicate significant reforms are needed to spur micro firms to grow into the ranks of the SMEs.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3138.

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Length: 45 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:iza:izadps:dp3138

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Keywords: employment growth; investment climate; corruption; regulatory framework; finance;

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References

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Citations

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Cited by:
  1. Kinda, Tidiane, 2010. "Investment Climate and FDI in Developing Countries: Firm-Level Evidence," World Development, Elsevier, vol. 38(4), pages 498-513, April.
  2. T. Dinh, Hinh & Mavridis, Dimitris A. & Nguyen, Hoa B., 2010. "The binding constraint on firms'growth in developing countries," Policy Research Working Paper Series 5485, The World Bank.
  3. Eric J. Bartelsman & John C. Haltiwanger & Stefano Scarpetta, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," NBER Working Papers 15490, National Bureau of Economic Research, Inc.
  4. Marialuz Moreno Badia & Veerle Slootmaekers, 2009. "The Missing Link Between Financial Constraints and Productivity," IMF Working Papers 09/72, International Monetary Fund.
  5. Villa, Stefania, 2010. "Exploring the linkages between investment and employment in Moldova : a time-series analysis," ILO Working Papers 455342, International Labour Organization.
  6. Hinh T. Dinh & George R.G. Clarke, 2012. "Performance of Manufacturing Firms in Africa : An Empirical Analysis," World Bank Publications, The World Bank, number 11959, October.
  7. Campos, Nauro F & Estrin, Saul & Proto, Eugenio, 2010. "Corruption as a Barrier to Entry: Theory and Evidence," IZA Discussion Papers 5243, Institute for the Study of Labor (IZA).
  8. Almeida, Rita K. & Susanli, Z. Bilgen, 2011. "Firing Regulations and Firm Size in the Developing World: Evidence from Differential Enforcement," IZA Discussion Papers 6006, Institute for the Study of Labor (IZA).
  9. Almeida, Rita K., 2009. "Openness and Technological Innovation in East Asia: Have They Increased the Demand for Skills?," IZA Discussion Papers 4474, Institute for the Study of Labor (IZA).
  10. Thorsten Beck & Samuel Munzele Maimbo & Issa Faye & Thouraya Triki, 2011. "Financing Africa : Through the Crisis and Beyond," World Bank Publications, The World Bank, number 2355, October.
  11. Pasali, Selahattin Selsah, 2013. "Where is the cheese ? synthesizing a giant literature on causes and consequences of financial sector development," Policy Research Working Paper Series 6655, The World Bank.
  12. World Bank, 2011. "Challenges to Enterprise Performance in the Face of the Financial Crisis : Eastern Europe and Central Asia," World Bank Publications, The World Bank, number 2316, October.
  13. Dall'Olio, Andrea & Iootty, Mariana & Kanehira, Naoto & Saliola, Federica, 2013. "Productivity growth in Europe," Policy Research Working Paper Series 6425, The World Bank.
  14. Bartelsman, Eric & Haltiwanger, John & Scarpetta, Stefano, 2010. "Cross-country and within-country differences in the business climate," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 368-371, July.
  15. Diagne, Youssoupha S, 2013. "Impact of business environment on investment and output of manufacturing firms in Senegal," MPRA Paper 54227, University Library of Munich, Germany.
  16. Rijkers, Bob & Soderbom, Mans & Loening, Josef, 2009. "Mind the gap ? a rural-urban comparison of manufacturing firms," Policy Research Working Paper Series 4946, The World Bank.

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