UCLA International Institute




Investment Climate and Firm Performance in Developing Economies

By David Dollar, Mary Hallward-Driemeier, and Taye Mengistae

Abstract:  Drawing on recently completed firm-level surveys in Bangladesh, China, India, and Pakistan, this paper investigates the relationship between investment climate and firm performance.  These standardized surveys of large, random samples of firms in common sectors reveal that objective measures of the investment climate vary significantly across countries and across locations within these countries.  The authors focus primarily on measures of the time or monetary cost of different bottlenecks (e.g., days to clear goods through customs, days to get a telephone line, sales lost to power outages).  For many of these costs, the obstacles are lower in China than in Bangladesh or India, which in turn are superior to Pakistan.  There is also systematic variation across cities within countries.  The authors estimate a production function for garment firms and show that total factor productivity is systematically related to the investment climate indicators.   Factor returns (wages for a given quality of human capital and rate of profit) are also higher where investment climate is better. These higher returns then have dynamic effects: accumulation and growth at the firm level is higher where investment climate is good. 

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