Regulatory Framework and Private Investment: Empirical Evidence for Developing Countries

This paper analyzes the impact of business regulation on private investment in developing countries with a particular emphasis on sub-Saharan Africa. Using the principal component analysis methodology, we construct the following composite indexes of the regulatory framework: entry regulation, employment regulation, regulation of enforcing contracts, regulation of property registration and business closure regulation. This last indicator is also used as a proxy for investment irreversibility. The empirical analysis is performed with a panel data of 53 developing countries, including 18 sub-Saharan African countries over the period 2003-2007. The empirical results of the 3SLS estimations suggest that the complexity of the regulation of entry and employment has a negative and significant impact on private investment. However, the regulations of enforcing contracts and property registration are not statistically significant. The regulation of business closure measured by the recovery rate of bankrupt firms has a positive and significant effect. We also found that the private investment rate in sub-Saharan Africa would have been improved by about 4.57% over the period 2003-2007 if the average quality of the business regulation in the region had been equal to that of all other regions in our sample, all things being equal.