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

  • Aterido, Reyes

    ()

    (World Bank)

  • Hallward-Driemeier, Mary

    ()

    (World Bank)

  • Pagés, Carmen

    ()

    (Inter-American Development Bank)

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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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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  1. Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2008. "How Important Are Financing Constraints? The Role of Finance in the Business Environment," World Bank Economic Review, World Bank Group, vol. 22(3), pages 483-516, November.
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  9. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2005. "Investment Climate and Firm Performance in Developing Economies," Economic Development and Cultural Change, University of Chicago Press, vol. 54(1), pages 1-31, October.
  10. Steven J. Davis & John Haltiwanger, 1996. "On the Driving Forces Behind Cyclical Movement, in Employment and Job Reallocation," NBER Working Papers 5775, National Bureau of Economic Research, Inc.
  11. James Tybout, 1998. "Manufacturing Firms In Developing Countries: How Well Do They Do, And Why?," Development and Comp Systems 9805004, EconWPA.
  12. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2009. "Measuring and Analyzing Cross-country Differences in Firm Dynamics," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 15-76 National Bureau of Economic Research, Inc.
  13. Fisman, Raymond & Svensson, Jakob, 2007. "Are corruption and taxation really harmful to growth? Firm level evidence," Journal of Development Economics, Elsevier, vol. 83(1), pages 63-75, May.
  14. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Juan Botero, 2003. "The Regulation of Labor," NBER Working Papers 9756, National Bureau of Economic Research, Inc.
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  16. David H. Autor & William R. Kerr & Adriana D. Kugler, 2007. "Do Employment Protections Reduce Productivity? Evidence from U.S. States," Harvard Business School Working Papers 07-048, Harvard Business School.
  17. Haltiwanger, John & Scarpetta, Stefano & Schweiger, Helena, 2006. "Assessing job flows across countries : the role of industry, firm size, and regulations," Policy Research Working Paper Series 4070, The World Bank.
  18. Bartelsman, Eric & Haltiwanger, John & Scarpetta1, Stefano, 2004. "Microeconomic evidence of creative destruction in industrial and developing countries," Policy Research Working Paper Series 3464, The World Bank.
  19. Hallward-Driemeier, Mary & Aterido, Reyes, 2009. "Comparing Apples with....Apples : how to make (more) sense of subjective rankings of constraints to business," Policy Research Working Paper Series 5054, The World Bank.
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  23. repec:dgr:uvatin:20040114 is not listed on IDEAS
  24. Ahsan, Ahmad & Pages, Carmen, 2007. "Are all labor regulations equal ? Assessing the effects of job security, labor dispute, and contract labor laws in India," Policy Research Working Paper Series 4259, The World Bank.
  25. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
  26. Inessa Love & Nataliya Mylenko, 2003. "Credit reporting and financing constraints," Policy Research Working Paper Series 3142, The World Bank.
  27. Reinikka, Ritva & Svensson, Jakob, 2002. "Coping with poor public capital," Journal of Development Economics, Elsevier, vol. 69(1), pages 51-69, October.
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