Investment climate assessment based on demean Olley and Pakes decompositions: methodology and application to Turkey's investment climate survey

Abstract

Most empirical studies show strong detrimental evidence that regulatory, and administrative, barriers to entry have on productivity and on firm growth. In this paper we evaluate and measure the total factor productivity (TFP) impacts of having; low quality physical infrastructures (electricity, telecommunications, transport, customs, etc.) and bad social infrastructures (rules of law, informality, corruption, etc.). We suggest evaluating the impact on average productivity (TFP) and on the allocative efficiency of production among firms based on several versions of the Olley and Pakes (O&P) decompositions. We evaluate the advantages and disadvantages of each the O&P decomposition in terms of their IC explanatory power. Once we have measured those IC impacts, we compare them with other sources of empirical information obtained from firm’s perceptions on main bottlenecks for firm growth and from doing business reports of the World Bank (2007). For the econometric analysis, we use firm level data bases from Turkey’s manufacturing sector based on Investment Climate surveys (ICs) done by the World Bank. These ICs are done in many other developing countries and therefore we propose to make crosscountry comparisons based on a new demean concept of TFP that also reduces the heterogeneity if using several robust productivity measures within each country.