Investment Climate Effects on Alternative Firm-Level Productivity Measures

Abstract

Developing countries are increasingly concerned about improving country competitiveness and productivity. Investment Climate surveys (ICs) at the firm level, are becoming the standard way for the World Bank to identify key obstacles to country competitiveness. This paper develops a general to specific econometric methodology, based on firm level observable fixed effects that generate robust investment climate effects (elasticities) on total factor productivity (TFP). By robust IC elasticities on TFP we mean elasticity estimates with equal signs and of similar magnitudes for several competing TFP measures. We apply this econometric methodology to the IC survey of Costa Rica showing how robust the investment climate effects are for several measures of TFP when conditioning on relevant plant-level information that is usually unobserved. For the economic evaluation we estimate the marginal effects of each IC variable on TFP as well as their IC impacts on average TFP obtaining important economic differences. These IC estimates are obtained from five blocks of IC variables, (i) infrastructure, (ii) red tape, corruption and crime, (iii) finance and corporate governance, (iv) quality, innovation and labor skills and (v) other control variables, could be used as benchmarks to assess cross-country IC assessments of TFP.