The nexus between business-investment climate and firm performance in the Middle East and North Africa (MENA) region

Giovanis, Eleftherios; Özdamar Giovanis, Öznur Article The nexus between business-investment climate and firm performance in the Middle East and North Africa (MENA) region Review of Economics and Political Science (REPS) Provided in Cooperation with: Cairo University, Cairo Suggested Citation: Giovanis, Eleftherios; Özdamar Giovanis, Öznur (2022) : The nexus between business-investment climate and firm performance in the Middle East and North Africa (MENA) region, Review of Economics and Political Science (REPS), ISSN 2631-3561, Emerald, Bingley, Vol. 7, Iss. 4, pp. 257-285, https://doi.org/10.1108/REPS-09-2020-0138 This Version is available at: https://hdl.handle.net/10419/316065 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ The nexus between business–investment climate and firm performance in the Middle East and North Africa (MENA) region Eleftherios Giovanis Department of International Trade and Business, Bakircay University, Izmir, Turkey, and Oznur Ozdamar Department of Economics, Bakircay University, Izmir, Turkey Abstract Purpose –Effective business and investment climate can lead to a higher rate of investment, profits and improved productivity, through the creation of an institutional environment, where the state provides high-quality public goods. This study aims to explore the impact of the business–investment climate on firm performance in a sample of six countries in the Middle East and North Africa (MENA) region and Turkey. Furthermore, we extend our analysis to explore the impact of business–investment climate on the resource misallocation in Egypt and Turkey. Design/methodology/approach –The study used fixed effects models to investigate the relationship between the business and investment climate, expressed by the obstacles in state–business relations- and the firm performance, which is measured by the firm’s value-added, the labour productivity and the total factor productivity To reduce the endogeneity coming from possible reverse causality and the perceptions about the business climate, an instrumental variables (IV) approach applying the two-stage least squares (2SLS) method was followed. The empirical analysis relies on data derived from the World Bank Enterprise Surveys. Findings –Based on estimates, the obstacles in business climate may reduce the firm performance measures by 15–40%. These findings indicate the importance of quality in the business climate and how the improvement in its efficiency can have a very considerable positive impact on firms’performance and thus on the overall economic growth of a country. Originality/value –This is the first study exploring the impact of business–investment climate on various measures of the firm performance and the resource misallocation in a large sample of countries in the MENA region. Keywords Economic development, Governance, Middle East and North Africa region, Resource misallocation, State business relations, Total factor productivity Paper type Research paper 1. Introduction An effective business and investment environment is crucial and is seen as a key determinant of economic growth, development and structural transformation in low-income countries (Hausmann, 2014). The mechanism and channels through which business climate can boost The business and investment climate nexus 257 JEL Classification —D73, K15, L5, O1, O57, O43, O49 © Eleftherios Giovanis and Oznur Ozdamar. Published in Review of Economics and Political Science. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons. org/licences/by/4.0/legalcode The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/2631-3561.htm Received 11 September 2020 Revised 11 May 2021 6 December 2021 Accepted 4 January 2022 Review of Economics and Political Science Vol. 7 No. 4, 2022 pp. 257-285 Emerald Publishing Limited e-ISSN: 2631-3561 p-ISSN: 2356-9980 DOI 10.1108/REPS-09-2020-0138 and support economic growth are several. Political stability, anti-corruption, investment incentives, robust trade and healthy macroeconomic policy can minimize uncertainties in investors’planning, and by achieving this, they can raise the investment rates. Creating an institutional environment where the state provides a high quality of public goods, including anti-bureaucracy and anti-corruption strategies, can lead to higher investment rates. Quality of public goods also includes infrastructure, such as electricity and transportation, and the availability of an educated workforce. This study attempts to investigate the impact of business and investment climate on the economic performance of firms in a sample of countries in the Middle East and North Africa (MENA) region. In this case, we define business and investment climate as the institutional, policy and regulatory environment in which firms operate. If an economy is characterized by political instability, if the government’s provision or regulation of infrastructure and financial services is inefficient, if the local government is highly bureaucratic and corrupt, then returns on potential investments will be low and uncertain, and accumulation and growth will be limited. Returns and accumulation, on the other hand, should be high in developing economies producing a healthy governance environment and an efficient business and investment climate (Dollar et al., 2005). Therefore, the aim is to explore the role of business–investment climate expressed by various indicators on firm performance. These indicators include policies that attempt to minimize political instability and eliminate corruption; incentives through lower taxes; supply and quality of public goods, such as electricity and transportation; efficiency in the financial services and access to land and credit; labour and custom regulations. Sen and Velde (2009) argue that an effective business–investment climate may contribute to industrial development and firm growth by two opposite forces. First, the states may not address market failures because they can be captured by elites or are unlikely to have perfect information. Second, markets may fail to achieve the optimal allocation of resources, such as education and innovation. Thus, we argue that business climate can be an effective underlying factor of economic growth for firms. It may provide a more optimal allocation of resources in an economy, including increased efficiency of the state and its involvement in removing obstacles and supporting the private sector activities, increasing in this way the firm performance and growth. The motivation of this study for focusing on the business climate as an additional factor of economic performance is twofold. First, there is long-standing literature in political economy and political science providing evidence that business and investment climate can enhance growth and economic performance (Amsden, 1989;Fajnzylber et al., 2009;Sen and Velde, 2009;Qureshi and Te Velde, 2013). Second, we attempt to explore and evaluate the impact of business and investment climate index on firm performance in various countries of the MENA region using detailed micro-level data and an instrumental variables (IV) approach. Public sector investments and employment cannot be relied on solely to boost growth and create much-needed jobs, especially for the region’s young population. However, public authorities can play an equally important role by fostering a business climate that encourages private sector development. A motivation for exploring the role of the business climate and its obstacles in the MENA region countries is that roughly 65% of the population is under 35 years old, and the youth unemployment is over 25% (Dimova et al., 2016). Thus, by exploring the impact of business climate obstacles on the firm performance, and investigating the effect on job creation in future studies, we can identify and understand the dynamics of those obstacles. To the best of our knowledge, this is the first study exploring the role of business and investment climate and its obstacles in the performance of firms in a large sample of MENA region countries. Moreover, it is one of the few studies attempting to establish a causal REPS 7,4 258 inference and to explore the relationship between business obstacles and resource misallocation in Egypt and Turkey. The findings support the argument that an effective business and investment climate can boost a firm’s performance. In particular, major obstacles to the business environment have on average a significant negative effect on valueadded, labour productivity and TFP ranging between 15 and 40%. The paper is organized as follows: In section 2, we briefly present the earlier studies on the relationship between business climate and firm performance. In section 3, we describe the methodological framework and the data employed in the empirical analysis. In section 4,we report the results, and in section 5, we discuss the main concluding remarks of the study. 2. Literature review The literature has emphasized the role of good governance on economic development, including among others the political freedom and stability, lack of corruption and rule of law. Sen and Velde (2009) argue that besides institutional factors, the business and investment climate plays a significant role in determining economic growth disparities. According to the economic theory and previous studies, an effective business and investment climate can have a positive effect on economic growth and performance by increasing both the rate and productivity of investment (Rodrik et al., 2004;Qureshi and Te Velde, 2013). The effective business climate is associated with the establishment of institutional environments that the state provides a higher quality of public goods, including effective public administration, lack of corruption and infrastructure, such as Internet provision and water and electricity supply without interruptions. Overall, at the macro level, a healthy and good business–investment climate is associated with good governance and institutions, and their importance is welldocumented in promoting growth (Knack and Keefer, 1995;Mauro, 1995;Rodrik et al., 2004). Following the evidence of macro-level studies, a growing body of literature has attempted to investigate the growth–institutions nexus at the micro-level. Beck et al. (2005) used firmlevel data for 54 countries to explore the impact of legal, financial and corruption issues on firms’growth rates and their findings show that these factors limit and reduce firms’growth and the impact is stronger for the small firms. Scarpetta et al. (2002) found that stringent product market regulations and high hiring and firing costs in Organisation for Economic Cooperation and Development (OECD) countries have significant adverse effects on industrial productivity. Furthermore, their results show that strict regulations on entrepreneurial activity discourage the entry of new small firms. The study by Fajnzylber et al. (2009) provides evidence that state intervention and support contribute to the firm growth. More specifically, Fajnzylber et al. (2009) used data for Mexican firms and they evaluated the impact of government support, identifying treatment effects of credit, training and tax payments on the likelihood of firm survival, profits and growth. Apart from access to finance, political instability, corruption and tax administration, infrastructure is also a major component of the quality in the business and investment climate. More specifically, Dollar et al. (2005) used firm-level data in developing countries to explore the relationship between investment climate and firm performance, where the former is proxied by the days required to get a telephone line, sales lost to power outages and time spent dealing with government bureaucracy. They found that the factor returns, indicated by wages and rates of profit, are higher when the investment climate is better. Therefore, these characteristics contribute to the construction of a better business and investment climate by coordinating issues and failures in the market, reducing political instability and establishing a check and balance mechanism for public policies such as expenditures and taxes. The study most related to ours is the report by Schiffbauer et al. (2015), where the authors found that political instability, corruption and inadequate electricity supply are negatively related to firm performance. However, their empirical analysis is limited to evidence provided by descriptive statistics. Furthermore, they do not explore the relationship between business The business and investment climate nexus 259 climate obstacles and resource misallocation, as we do in Egypt and Turkey. There are few recent studies exploring the role of business and investment climate in the MENA region countries (EBRD et al., 2016;Brown and Earle, 2017;Hosny, 2017;Karahasan and Bilgel, 2020; Ozdamar et al., 2020). For instance, Karahasan and Bilgel (2020) using a causal mediation analysis explored the role of access to finance in eight MENA region countries and Turkey over the period 2013–2015, and they found obstacles related to access to finance reduce firm performance by about 2.3–4.4%. Firm performance in their study is measured by various indicators, including labour productivity growth, returns on sales and returns on assets among others. Similarly, Brown and Earle (2017) explored the impact of access to Small Business Administration (SBA) loans on firms’employment growth in the USA in 1987–2012. The findings highlight the importance of access to finance and credit, suggesting that $1 million of loans raises job creation in the recipient firms. In particular, during the first three post-loan years, the firms have created on average 3.5 jobs for every million dollars of loans, and between 5 and 7 jobs at five years following the loan receipt. Various studies have explored the role of governments and financial institutions in firm performance (Christmann and Taylor, 2001a,b,2002;Hosny, 2017;Arayssi et al.,2019;Ozdamar et al., 2020;Abdo and Fakih, 2022). For instance, Abdo and Fakih (2022) argue that the legal form plays a significant role in the firm performance, and they demonstrate that companies with open and closed shareholding and those with a limited partnership perform better than the sole proprietorship firms in terms of annual sales and annual productivity growth rates. Arayssi et al. (2019) extended their analysis to consider the causal impact of the Arab Spring and government institutions on the finance–growth nexus. Their findings demonstrate that political instability has a negative impact on growth, and while a well-functioning financial system is a necessary condition it is not a sufficient condition to increase growth. Therefore, governments and policies should focus on the improvement of a country’s legal system and the efficiency of institutions’ operation, freedom of expression and citizen’s participation in selecting government and to ensure the persistence of those policies over an extended period. Hosny (2017), using data on about 6,000 firms in eight countries of the MENA region, derived from the European Bank for Reconstruction and Development (EBRD) and World Bank over the period 2009–2012, explored the impact of political instability on firm performance. The author measured the firm performance as the employment growth and firms’ sales and found a negative effect of the political instability in firm performance. Similarly, Ozdamar et al. (2020) explored the impact of several obstacles in business and investment climate on a firm’s performance, in Egypt and Turkey, measured by job creation and destruction. The findings show that access to finance and political instability are two major obstacles in the business and investment climate, while other important obstacles found were quality of the electricity supply and corruption in Egypt, and completion from the informal sector and high tax rates were the other two major obstacles in the business climate of Turkey. However, this study aims to explore the impact of an aggregate index, comprising various obstacles in the business and investment climate, on the performance of firms in six countries of the MENA region and Turkey. Furthermore, we aim to perform a cross-country analysis and investigate the impact of major individual obstacles, such as access to finance and credit, corruption, political stability, electricity supply and tax rates among others. 3. Methodology and data 3.1 Methodology For our empirical work we estimate the following regression: FPi;s;j;t¼β0þβ1BICIi;j;tþβ0Xi;j;tþ μ sþljþθtþ ε i;s;j;t(1) REPS 7,4 260 FP denotes the firm performance, for firm i, in industry s, in state-area jand time t; BICI indicates the measures of business–investment climate discussed later and Xis a vector of standard control variables. Set μ s controls for fixed-industry or sector effects, set l j denotes the location-area fixed effects and θ t is the time-fixed effects in the case we use more than one wave, while ε is the error term. We use three variables as proxies to firm performance; the value-added, which is defined as the sales minus the costs purchased from other firmsbusinesses; labour productivity and TFP. The region-area effects in regression (1) may capture geographical and cultural characteristics, such as weather and climatic differences, infrastructure properties, whether the area is coastal or landlocked and other unobserved characteristics. The time effects are included to capture time national level shocks, including weather shocks, oil prices and financial crises and other macroeconomic shocks that may affect the outcome of interest. However, the business–investment climate index may be endogenous to firm growth. The three main courses of endogeneity include omitted-variable bias, reverse causality, selfstatement and perception about the obstacles. For example, some managers may report complaints even though they are not obstacles, or some inefficient firms may overstate the constraints that they actually face (Beck et al., 2005;Aterido et al., 2011). Therefore, the business–investment climate index (BICI) may be endogenous because of measurement error due to perception, or because of possible reverse causality between BICI and the outcomes of interest explored in the study. On the one hand, a good BICI may have a positive impact on firm performance, while on the other hand, more profitable and productive industries may be able to organize themselves better and bring out a more effective BICI. For the endogeneity issue, we implement the Two-Stage Least Squares (2SLS) method and we use two sets of instrumental variables for the BICI. The first set consists of variables that attempt to solve for the bias derived from the perception about the obstacles and they shift the focus from the self-reported statements towards contextual factors. The first variable is completed by the interviewer and the question is “It is my perception that the responses to the questions regarding opinions and perceptions are”, and the possible answers include (a) Truthful,(b)Somewhat Truthful and (c) Not truthful. The second variable answers the question “This questionnaire was completed in”and the possible answers include (a) One visit in face-to- face interview with one person,(b)One visit in face-to-face interview with different managers/staff and (c) Several visits. Our suggestion of using these two categorical variables lies in the argument that they are correlated with the perceptions of the business climate and cannot directly affect the outcomes of interest, while they may also account for the perception bias. Even though the business climate can have an impact on a firm’s performance, the perception of the interviewer cannot affect them, but it can be correlated with the reliability of the individual response. Cojocaru (2012) has ranked each household’s well-being using the interviewer’s judgment and perception as an instrumental variable, and the results are consistent. The interviewer’s influence on the respondent’s replying behaviour is reflected in the first instrument. Although the respondent’s honesty is what determines the quality of the data, the interviewer’s ability to create a trusting environment that allows for that is equally important. The second variable is related to the respondent’s response, and it may serve as a potential instrumental variable since the perception of obstacles in the state–business relations and the business climate may vary depending on whether the questions are answered by the same or a different person across multiple visits. In particular, by interviewing different managers and staff members, we can reduce the perception bias derived from one person, while their answers cannot affect the firm performance outcomes. The second set of instrumental variables includes the industry-location averages of the following: The percentage of the firms paying for security; the percentage of firms inspected by tax officials over the last 12 months; the number of inspections; percentage of firms facing competition from the informal sector; percentage of firms with loan-credit; percentage of The business and investment climate nexus 261 firms experiencing losses due to theft and vandalism; percentage of firms where a giftpayment was requested; the percentage of the firms whose financial statements were checked and certified by an external auditor; percentage of firms formally registered when they started the operations and the industry concentration based on sales. The reasoning underlying the validity of the last set of instruments is that industrylocation-year average levels are dependent on industry and location characteristics, such as dependence on government services industries, industries’access to land, infrastructure and underlying technologies. This identification allows for a correlation between those averages and business–investment climate, but should, however, be uncorrelated with unobservables that are potentially correlated with the firm performance measures we explore (Collins et al., 2009). For instance, the time spent for tax officials and meetings with bureaucrats could depict the degree of control that those bureaucrats exert on the firm (Svensson, 2003), while the other instruments show the degree of dependence on government services. In particular, the industry-location effect may capture the shifts in electricity supply from various sources available, such as hydroelectric power and natural gas availability, and state-level rainfall and weather conditions. An individual firm level perception about the business and investment climate willdepend not only on the characteristics of that particular firm but also on characteristics specific to the location and industry in which it operates. At the industry and location level, such as those located in the capital, industrial zones or close to political centres and banking institutions, the level of rewards, obstacles, inspection by tax officials and engagement with bureaucrats, will depend on the accountability and transparency of the political system. As specific sectors may be more dependent on public procurement, other industries can be strategically more important, thus this variation is not driven by firm characteristics, but by factors determined by these industry-location characteristics (Angrist and Krueger, 2001). The last outcomes we explore refer to resource misallocation. Due to word limitations, we present more details about the methodology and the results in the supplementary material. Since we use more than one instrumental variable for one endogenous variable, we prefer the 2SLS method. Furthermore, based on the identification strategy, other frameworks to infer causality, such as the difference-in-differences (DID), the regression discontinuity design (RDD) and propensity score matching (PSM), cannot be implemented. The main reason is that we do not evaluate a policy, and there is no treated and control group. Also, we do not have a shock that has created an exogenous variation in the business and investment climate, and there is no legislative change that could have been used for randomization (Angrist and Krueger, 2001). Furthermore, our empirical strategy does not identify any randomized control trial as we employ observational data from firm surveys. Thus, we use the 2SLS to create an exogenous variation in the endogenous variable of the business and investment climate. 3.2 Data The analysis relies on data derived from the WBES [1]. We will explore the following countries: Egypt, Jordan, Iraq, Morocco, Tunisia, Turkey and Yemen. The period examined is 2006–2016, and it varies by country. For Egypt, we consider the panel data survey in 2008, 2013 and 2016, for Turkey we obtain the panel data survey over the period 2008–2013, and for Yemen the panel survey in 2010 and 2013. For Jordan, we use the cross-sectional survey in 2006 and 2013, for Morocco the surveys in years 2007 and 2013. We derived the data for Tunisia from the cross-sectional survey in 2013, and for Iraq, we use the cross-sectional survey in 2011. The core questionnaire contains questions answered by the business owners and high ranked managers providing information about the business environment. More specifically, the questions refer to evaluations about the severity of obstacles that firms face. The REPS 7,4 262 interviewers ask firms to rank 15 components of the business environment, indicating which one presents the largest obstacle and to rank them on a scale of 0 (no obstacle) to 4 (severe obstacle). In Table 1 we report the descriptive statistics for all the countries explored in the study, including the BICI and the control variables. The summary statistics do not reveal any important information except for the female ownership that is rather low, especially in Iraq at 6.9%, followed by Jordan at 9%, Yemen at 11%, Morocco at 13% and Egypt at 16%. It is remarkable to say that the percentage of female firm ownership is much higher in Tunisia at 36% followed by 31% in Turkey. The differences in the proportions of female firm ownership are attributed to various factors, including obstacles for women to own a firm or being partners because of their gender, which are linked to social norms and values. Furthermore, countries characterized by a large informal sector that does not allow women to own firms in the formal sector recorded in the WBES is another explanation of the differences in the firm female ownership. Female ownership is also lower in countries where they face more constraints in access to finance and credit. Capital availability is more restricted for women business owners in countries where they are considered as less educated about financial growth strategies and where they face challenges to finance their company due to lack of a business track record (Youness, 2007;OECD/ILO/CAWTAR, 2020). Furthermore, women entrepreneurs tend to have a lower socio-economic profile than their male counterparts and are more likely to have fewer resources to start a business (OECD, 2017), which varies in each country of our sample. The value-added and TFP are rather similar among the countries explored. Based on the data availability and earlier studies, labour productivity is defined as the sales over the number of employees (Schiffbauer et al., 2015). This index is high in countries, such as Egypt, Iraq and Yemen, and much lower in Turkey and Jordan, because the former countries probably face lower labour costs and wages, which are usually a significant part of the total costs, and therefore increase the value of sales. About the business environment, we created an aggregate index of business–investment climate considering all the obstacles presented in Figures 1–7derived by the predicted values of the principal component analysis. We report the relevant summary statistics in Table 1. In Table 2 we present the proportions of the answers to the questions of the first set of the instruments. We should notice that in Tunisia the second instrumental variable, about the frequency of the interview completion is missing, so we will use only the first variable as an instrument in the regression analysis, along with the second set of instruments we discussed earlier. A shred of initial evidence comes from the correlation between the instrument variables and the outcomes of interest, which is insignificant, while their correlation with the business and investment climate index is statistically significant at the 1% level in the majority. 4. Empirical results The first step of our analysis involves a visual presentation of the major obstacles to the business climate in the countries we explore. In particular, the answers reply to the following question: “Biggest obstacle affecting the operation of this establishment”.InFigure 1,we illustrate the major obstacles in Egypt. Even though access to finance is reduced by 25% in 2008 to 12% in 2013, it is still considered one of the seven major obstacles. Moreover, we see that corruption was low in 2008 at 2% but increased at 5% in 2013. The most significant obstacle in 2013 was political instability, most probably due to the facts followed by the Arab Spring while in 2008, the specific obstacle was low, and in 2016 is reduced at 28%. We observe a significant reduction from 2008 to 2013 and 2016 for the competition from the informal sector and the inadequate education of the workforce. Corruption, even though is low, is quite The business and investment climate nexus 263 Egypt Mean Standard deviation Minimum Maximum Logarithm of value added 14.635 2.237 3.912 23.927 Labour productivity 11.3629 1.553 1.609 19.847 Logarithm of TFP 2.6933 1.763 3.3539 12.681 BICI index 3.67e-10 0.8988 1.508 2.543 Logarithm of firm size 3.623 1.455 0 9.9522 Young firm 0.1367 0.3436 0 1 Is one of the owners female? 0.1607 0.3673 0 1 Manager’s years of experience 18.489 12.041 1 61 International quality assurance qualification 0.2307 0.4213 0 1 Is the firm part of another establishment? 0.1797 0.3840 0 1 Jordan Logarithm of value added 12.717 2.414 2.0794 19.942 Labour productivity 9.5536 2.404 1.727 16.060 Logarithm of TFP 1.4768 1.467 7.698 10.013 BICI index 3.45e-10 0.9029 1.471 2.544 Logarithm of firm size 3.482 1.474 0.6931 9.047 Young firm 0.2286 0.4201 0 1 Is one of the owners female? 0.0902 0.2866 0 1 Manager’s years of experience 17.381 11.011 1 60 International quality assurance qualification 0.1938 0.3955 0 1 Is the firm part of another establishment? 0.4823 0.4999 0 1 Iraq Logarithm of value added 19.094 1.157 15.123 23.102 Logarithm of labour productivity 17.112 1.047 13.163 20.654 Logarithm of TFP 0.0513 0.6817 2.0481 2.771 BICI index 4.72e-10 0.9412 1.928 2.035 Logarithm of firm size 2.305 0.7515 0 5.459 Young firm 0.2204 0.4148 0 1 Is one of the owners female? 0.0689 0.2535 0 1 Manager’s years of experience 12.308 8.065 1 60 International quality assurance qualification 0.0241 0.1537 0 1 Is the firm part of another establishment? 0.0621 0.2416 0 1 Morocco Logarithm of value added 15.969 2.001 8.464 22.762 Labour productivity 12.739 1.594 6.897 19.336 Logarithm of TFP 5.573 1.367 1.761 14.570 BICI index 4.06e-10 0.9304 1.445 1.928 Logarithm of firm size 3.884 1.334 0 8.724 Young firm 0.0816 0.2739 0 1 Is one of the owners female? 0.1292 0.3356 0 1 Manager’s years of experience 21.957 11.277 1 64 International quality assurance qualification 0.2063 0.4048 0 1 Is the firm part of another establishment? 0.4052 0.4911 0 1 Tunisia Logarithm of value added 14.257 1.676 8.294 19.920 Logarithm of labour productivity 10.736 1.445 7.340 14.976 Logarithm of TFP 4.086 1.273 0.687 10.166 BICI index 1.34e-09 0.8914 1.170 3.057 Logarithm of firm size 3.5692 1.380 0 7.766 Young firm 0.0813 0.2736 1 1 Is one of the owners female? 0.3675 0.4826 0 1 (continued) Table 1. Summary statistics of the variables employed in the analysis REPS 7,4 264 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climate 0.1452*** (0.0665) 0.1511** (0.0229) 0.1072** (0.0491) Business climate 0.3260** (0.1351) 0.3730** (0.1571) 0.1953* (0.0995) Logarithm of firm size 0.9626*** (0.0292) 0.0191 (0.0312) 0.0975*** (0.0309) Logarithm of firm size 0.9491*** (0.0400) 0.0221 (0.0347) 0.1013*** (0.0359) Young firms 0.0501 (0.0796) 0.2875** (0.1325) 0.0335 (0.0478) Young firms 0.0441 (0.0834) 0.2602** (0.1266) 0.0429 (0.0375) Is one of the owners female? (Yes) 0.0448 (0.0780) 0.1369 (0.1042) 0.0207 (0.0959) Is one of the owners female? (Yes) 0.0489 (0.0634) 0.1127 (0.1158) 0.0199 (0.0825) Manager’s years of experience 0.0024 (0.0021) 0.0011 (0.0033) 0.0023 (0.0030) Manager’s years of experience 0.0017 (0.0032) 0.0020 (0.0036) 0.0017 (0.0033) International quality assurance qualification (Yes) 0.3822*** (0.0934) 0.4906*** (0.0994) 0.0676 (0.0989) International quality assurance qualification (Yes) 0.4231*** (0.1136) 0.5214*** (0.1093) 0.1757 (0.1153) Is the firm part of another establishment? (Yes) 0.2095** (0.0880) 0.2156*** (0.0914) 0.0524 (0.0872) Is the firm part of another establishment? (Yes) 0.1921** (0.0811) 0.2142** (0.0972) 0.1853 (0.1149) Firm status (public owned) 0.0021 (0.0045) 0.0005 (0.0042) 0.0010 (0.0050) Firm status (public owned) 0.0034 (0.0060) 0.0005 (0.0040) 0.0008 (0.0047) No. observations 3,142 3,082 2,222 No. observations 2,833 2,814 1,951 R-square 0.6704 0.3212 0.6490 Centered R-Square 0.6217 0.1837 0.4105 Weak identification test 12.605 [0.0002] 15.302 [0.000] 14.738 [0.000] Hansen J statistic 5.303 [0.2910] 3.695 [0.4823] 9.286 [0.1976] Note(s): Standard errors within brackets, p-values within the square brackets, ***, ** and * indicate significance respectively at the 1, 5 and 10% level. The period of analysis is 2008–2016 Table 3. OLS and 2SLS regressions for business and investment climate in Egypt The business and investment climate nexus 271 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climate 0.1644* (0.0930) 0.1015 (0.1327) 0.1428* (0.7331) Business climate 0.2111* (0.4211) 0.2610 (0.4848) 0.1902* (0.1081) Logarithm of firm size 0.9904*** (0.0829) 0.0221 (0.0979) 0.0409 (0.1058) Logarithm of firm size 0.9676*** (0.0950) 0.0339 (0.1178) 0.0522 (0.0799) Young firms 0.1316 (0.2225) 0.0567 (0.2960) 0.1084 (0.0883) Young firms 0.1203 (0.2282) 0.0237 (0.2997) 0.0985 (0.1055) Is one of the owners female? (Yes) 0.7475*** (0.2613) 1.2679*** (0.2993) 1.3926*** (0.3285) Is one of the owners female? (Yes) 0.8461*** (0.2705) 1.4402*** (0.3060) 1.5531*** (0.3422) Manager’s years of experience 0.0121 (0.0097) 0.0056 (0.0102) 0.0118 (0.0109) Manager’s years of experience 0.0095 (0.0091) 0.0067 (0.0107) 0.0129 (0.0113) International quality assurance qualification (Yes) 0.1885 (0.2508) 0.2040 (0.2902) 0.4190* (0.2274) International quality assurance qualification (Yes) 0.1506 (0.2608) 0.1855 (0.2894) 0.4237* (0.2220) Is the firm part of another establishment? (Yes) 0.2616 (0.3141) 0.1878 (0.3640) 0.3227 0.3832) Is the firm part of another establishment? (Yes) 0.1710 (0.3472) 0.3124 (0.4316) 0.3838 (0.4221) Firm status (public owned) 0.0042 (0.0159) 0.0028 (0.0187) 0.0169 (0.0140) Firm status (public owned) 0.0053 (0.0160) 0.0022 (0.0182) 0.0188 (0.0144) No. observations 404 401 358 No. observations 386 381 343 R-square 0.4904 0.1122 0.1518 Centered R-Square 0.4849 0.1157 0.1568 Weak identification test 15.219 [0.0006] 13.957 [0.0012] 16.119 0.0001] Hansen J statistic 7.881 [0.4452] 6.448 [0.5838] 12.255 [0.1139] Note(s): Standard errors within brackets, p-values within the square brackets, *** and * indicate significance respectively at the 1 and 10% level. The period of analysis is 2006–2013 Table 4. OLS and 2SLS regressions for business and investment climate in Jordan REPS 7,4 272 quality assurance, which has a positive impact on TFP, while firms with female owners present lower performance. In Table 5, we report our OLS and 2SLS estimates for the obstacles in the business climate in Iraq, associated with a decrease in value-added by 22% and a decrease of labour productivity and TFP at 16 and 15%, respectively. A remarkable finding in Table 5 is that firm size is positively correlated with value-added but negatively associated with labour productivity and TFP. This finding indicates that value-added may not serve as the best indicator for measuring firm performance. Hence, smaller firms may use the labour inputs more efficiently, such as skilled employees, lower input costs, while large firms can achieve a higher sales volume because of economies of scale, market share and other characteristics. In Tables 6 and 7, we present the estimated results for the obstacles in the business climate in Morocco and Tunisia, respectively. In the case of Morocco, we find significant effects of the obstacles in business climate on value-added at 39% and TFP at 23%. In Tunisia, we find a negative and significant effect on value-added and TFP at 24 and 11%, respectively. As in the case of Iraq, we observe that the firm size is positively correlated with the value-added but has a negative relationship with both labour productivity and TFP. This may indicate that the state and public local authorities in these countries favour these firms by providing more subsidies, access to financial markets and other benefits, allowing them to keep sales and value-added at higher levels, compared to the small-medium firms. However, this does not imply that this also improves their productivity. In Table 8, we report the estimates for the major obstacles to business and investment climate in Turkey. Based on the results, we observe that the overall index of obstacles in business and investment climate in Turkey reduce the value-added and labour productivity by 17% and TFP by 12%. The effect becomes significantly higher based on the 2SLS and Panel B of Table 8, where the reduction reaches 27 and 25% respectively for value-added and labour productivity and 18% for the TFP. Firm size and young firms seem to be positively correlated with firm performance. Also, firms whose ownership consists of at least one female, have acquired an international certification of quality control and are part of another establishment, report higher value-added. In Table 9, we find that the obstacles in Yemen are significantly and negatively related to labour productivity and TFP at 24 and 34%, respectively. Large firms, as well as firms that are part of another establishment, and accredited with an international certification of quality, control present higher performance levels. In Table 10, we implement a cross-section country analysis. The main aim is to investigate the obstacles in BICI individually by pooling all the firms across the seven countries we explore and identifying the most important ones. The estimates derived from both OLS and 2SLS show that political instability followed by corruption and obstacles in access to finance and credit have the largest negative impact on the firm performance. Other major obstacles are the poor quality of the electricity supply, delays and obstacles in business licensing and permits, inadequately educated workforce and labour regulations. We should notice that even though tax rates were found to be a significant obstacle in Turkey, according to Figure 6, and up to some degree in Jordan and Egypt, overall they have a lower adverse effect on the firm performance, according to the remaining figures. The last part of the analysis refers to the misallocation using the covariance of the sales share and employment share based on the estimated TFP we employed in the earlier estimates. However, because of word limits, we present and discuss the results in the supplementary material. Overall, the results are consistent with the findings from previous studies (Amsden, 1989; Fajnzylber et al., 2009;Sen and Velde, 2009;Qureshi and Te Velde, 2013;Hosny, 2017;Arayssi et al., 2019;Karahasan and Bilgel, 2020;Ozdamar et al., 2020;Abdo and Fakih, 2022). Our results show that the obstacles in business and investment climate can negatively affect the firm performance, which is also found in the previous studies. In particular, Hosny (2017), The business and investment climate nexus 273 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climate 0.1558*** (0.0505) 0.1097* (0.0562) 0.0926** (0.0452) Business climate 0.2232** (0.1045) 0.1609* (0.0914) 0.1497* (0.0834) Logarithm of firm size 0.5207*** (0.1058) 0.5703*** (0.0823) 0.1609** (0.0795) Logarithm of firm size 0.4853*** (0.0888) 0.5279*** (0.0765) 0.2008** (0.0777) Young firms 0.1765 (0.1524) 0.0640 (0.1222) 0.0187 (0.1189) Young firms 0.1979 (0.1718) 0.0935 (0.1186) 0.0256 (0.1017) Is one of the owners female? (Yes) 0.3684* (0.1960) 0.3154* (0.1668) 0.1585 (0.1107) Is one of the owners female? (Yes) 0.4097* (0.2154) 0.2995* (0.1574) 0.1455 (0.1280) Manager’s years of experience 0.0207*** (0.0075) 0.0156** (0.0072) 0.0053 (0.0070) Manager’s years of experience 0.0197** (0.0080) 0.0222*** (0.0068) 0.0031 (0.0069) International quality assurance qualification (Yes) 0.0169 (0.3548) 0.3056 (0.2561) 0.1921 (0.2603) International quality assurance qualification (Yes) 0.0204 (0.3515) 0.3467 (0.2477) 0.2186 (0.2751) Is the firm part of another establishment? (Yes) 0.1402 (0.2173) 0.4912** (0.2459) 0.2021 (0.2346) Is the firm part of another establishment? (Yes) 0.1749 (0.2521) 0.3938* (0.2249) 0.1899 (0.2263) Firm status (public owned) 0.0162 (0.0111) 0.0039 (0.0071) 0.0022 (0.0087) Firm status (public owned) 0.0151 (0.0112) 0.0032 (0.0080) 0.0028 (0.0080) No. observations 692 439 404 No. observations 658 421 386 R-square 0.8048 0.5799 0.3105 Centered R-Square 0.3684 0.4824 0.1496 Weak identification test 15.338 [0.000] 15.211 [0.000] 16.033 [0.000] Hansen J statistic 7.990 [0.3353] 7.176 [0.3960] 7.791 [0.3736] Note(s): Standard errors within brackets, p-values within the square brackets, ***, ** and * indicate significance respectively at the 1, 5 and 10% level. The period of analysis is 2011 Table 5. OLS and 2SLS regressions for business and investment climate in Iraq REPS 7,4 274 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climate 0.2252** (0.1032) 0.1426 (0.2416) 0.1215** (0.0538) Business climate 0.3944** (0.1755) 0.3029 (0.2830) 0.2318** (0.0082) Logarithm of firm size 0.6919*** (0.1193) 0.0407 (0.1007) 0.1472* (0.0777) Logarithm of firm size 0.6945*** (0.1090) 0.0746 (0.1309) 0.1679** (0.0710) Young firms 0.1414 (0.1971) 0.6027 (0.7735) 0.1855 (0.2916) Young firms 0.1391 (0.2035) 0.4329 (0.7310) 0.2428 (0.3130) Is one of the owners female? (Yes) 1.1250*** (0.3509) 1.0245** (0.4219) 0.6741*** (0.2459) Is one of the owners female? (Yes) 1.1135*** (0.3246) 0.9519** (0.3927) 0.5806** (0.2722) Manager’s years of experience 0.0068 (0.0120) 0.0023 (0.0137) 0.0015 (0.0081) Manager’s years of experience 0.0069 (0.0109) 0.0036 (0.0124) 0.0018 (0.0097) International quality assurance qualification (Yes) 0.7022** (0.3268) 0.6230* (0.3717) 0.4128* (0.2130) International quality assurance qualification (Yes) 0.7043** (0.2955) 0.6225* (0.3555) 0.3881* (0.2064) Is the firm part of another establishment? (Yes) 0.2010 (0.3655) 0.2783 (0.4295) 0.1451 (0.2666) Is the firm part of another establishment? (Yes) 0.1774 (0.3403) 0.3210 (0.4022) 0.1029 (0.2912) Firm status (public owned) 0.0255 (0.0713) 0.0306 (0.0822) 0.0118 (0.0849) 0.0234 (0.0655) 0.0234 (0.0655) 0.0129 (0.0733) No. observations 541 528 302 No. observations 532 523 282 R-square 0.5030 0.2355 0.1999 Centered R- Square 0.5028 0.2241 0.1982 Weak identification test 13.139 [0.0004] 16.103 [0.000] 13.560 [0.0003] Hansen J statistic 10.315 [0.1579] 16.128 [0.0085] 0.380 [0.9990] Note(s): Standard errors within brackets, p-values within the square brackets, ***, ** and * indicate significance respectively at the 1, 5 and 10% level. The period of analysis is 2007–2013 Table 6. OLS and 2SLS regressions for business and investment climate in Morocco The business and investment climate nexus 275 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climate 0.1553** (0.0775) 0.1356 (0.1061) 0.0337** (0.0142) Business climate 0.2348** (0.1102) 0.2405 (0.1820) 0.1095** (0.0473) Logarithm of firm size 0.7963*** (0.0519) 0.3452*** (0.0772) 0.3012*** (0.1128) Logarithm of firm size 0.7756*** (0.0528) 0.3135*** (0.0836) 0.2549** (0.1102) Young firms 0.3137 (0.2181) 0.1371 (0.2996) 0.2776 (0.3632) Young firms 0.1095 (0.2209) 0.2302 (0.3600) 0.3002 (0.3473) Is one of the owners female? (Yes) 0.1083 (0.1254) 0.1031 (0.1817) 0.2429 (0.2336) Is one of the owners female? (Yes) 0.1092 (0.1252) 0.1056 (0.1965) 0.2392 (0.2098) Manager’s years of experience 0.0045 (0.0056) 0.0064 (0.0092) 0.0305*** (0.0162) Manager’s years of experience 0.0036 (0.0056) 0.0070 (0.0096) 0.0347** (0.0150) International quality assurance qualification (Yes) 0.5755*** (0.1460) 0.9365*** (0.2795) 0.6566** (0.2879) International quality assurance qualification (Yes) 0.5426*** (0.1446) 1.0938*** (0.2176) 0.7241** (0.3189) Is the firm part of another establishment? (Yes) 0.1056 (0.1880) 0.1616 (0.2670) 0.3192 (0.3386) Is the firm part of another establishment? (Yes) 0.0934 (0.1834) 0.2269 (0.2007) 0.3866 (0.4339) Firm status (public owned) 0.0058 (0.0100) 0.2084*** (0.0751) 0.0055 (0.0321) Firm status (public owned) 0.0055 (0.0098) 0.1882** (0.0860) 0.0097 (0.0309) No. observations 391 301 172 No. observations 391 312 175 R-square 0.7123 0.6471 0.7453 Centered R-Square 0.5915 0.2397 0.1275 Weak identification test 18.158 [0.000] 18.985 [0.000] 9.030 [0.0014] Hansen J statistic 4.686 [0.2336] 5.009 [0.1711] 5.987 [0.3220] Note(s): Standard errors within brackets, p-values within the square brackets, *** and ** indicate significance respectively at the 1 and 5% level. The period of analysis is 2013 Table 7. OLS and 2SLS regressions for business and investment climate in Tunisia REPS 7,4 276 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climate 0.1704*** (0.0511) 0.1673* (0.0854) 0.1232* (0.0663) Business climate 0.2732** (0.1214) 0.2566* (0.1353) 0.1854* (0.1038) Logarithm of firm size 0.8377*** (0.0880) 0.1275 (0.0859) 0.3910*** (0.0564) Logarithm of firm size 0.6839** (0.2881) 0.1651 (0.2169) 0.3655*** (0.0829) Young firms 0.1990 (0.3357) 0.0712* (0.0368) 0.5573** (0.2167) Young firms 0.2373 (0.4445) 0.0692* (0.0363) 0.5843** (0.2736) Is one of the owners female? (Yes) 0.3101* (0.1681) 0.1834 (0.2425) 0.1497 (0.1324) Is one of the owners female? (Yes) 0.2859* (0.1528) 0.2149 (0.2263) 0.1129 (0.1502) Manager’s years of experience 0.0133 (0.0088) 0.0162 (0.0104) 0.0027 (0.0054) Manager’s years of experience 0.0187 (0.0133) 0.0165 (0.0212) 0.0036 (0.0068) International quality assurance qualification (Yes) 0.1866* (0.1044) 0.1294 (0.2561) 0.2074 (0.1435) International quality assurance qualification (Yes) 0.2225* (0.1276) 0.1569 (0.2244) 0.1872 (0.1312) Is the firm part of another establishment? (Yes) 0.8496*** (0.2887) 0.6110* (0.3396) 0.1351 (0.1795) Is the firm part of another establishment? (Yes) 0.8172** (0.3910) 0.6003* (0.3133) 0.1394 (0.1937) Firm status (public owned) 0.0020 (0.0025) 0.0211 (0.0286) 0.1081*** (0.0103) Firm status (reference manufacturing) 0.0039 (0.0045) 0.0228 (0.0315) 0.1044*** (0.0292) No. observations 2,013 1,744 1,097 No. observations 1,871 1,615 946 R-square 0.3077 0.1840 0.2772 Centered R- Square 0.2202 0.1522 0.2514 Weak identification test 21.654 [0.000] 15.678 [0.000] 12.232 [0.0002] Hansen J statistic 13.274 [0.1506] 18.034 [0.0889] 9.984 [0.3517] Note(s): Standard errors within brackets, p-values within the square brackets, ***, ** and * indicate significance respectively at the 1, 5 and 10% level. The period of analysis is 2008–2013 Table 8. OLS and 2SLS regressions for business and investment climate in Turkey The business and investment climate nexus 277 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climate 0.1955 (0.1318) 0.1572* (0.0874) 0.1389** (0.0662) Business climate 0.3374 (0.4045) 0.2436** (0.1006) 0.3450* (0.1859) Logarithm of firm size 1.2263*** (0.1101) 0.4227* (0.2267) 0.8125*** (0.2130) Logarithm of firm size 1.3199*** (0.1379) 0.4666** (0.1903) 0.7190** (0.3303) Young firms 0.5936 (0.4030) 0.2386 (0.3006) 0.5513 (0.9584) Young firms 0.6141 (0.4843) 0.2148 (0.3466) 0.5818 (0.8035) Is one of the owners female? (Yes) 0.3670 (0.3829) 0.0280 (0.1082) 0.5457 (0.6335) Is one of the owners female? (Yes) 0.4401 (0.3857) 0.0324 (0.0788) 0.4386 (0.5380) Manager’s years of experience 0.0155 (0.0099) 0.0025 (0.0086) 0.0190 (0.0151) Manager’s years of experience 0.0157 (0.097) 0.0043 (0.0137) 0.0151 (0.0183) International quality assurance qualification (Yes) 0.8994** (0.3509) 0.3819 (0.3155) 1.8180** (0.7207) International quality assurance qualification (Yes) 0.8178** (0.3559) 0.3247 (0.2555) 1.5600** (0.7494) Is the firm part of another establishment? (Yes) 0.4898** (0.2267) 0.5929** (0.2421) 0.4149 (0.4737) Is the firm part of another establishment? (Yes) 0.5688** (0.2359) 0.6985** (0.3287) 0.3931 (0.3522) Firm status (public owned) 0.0027 (0.0158) 0.0047 (0.0181) 0.0520 (0.0394) Firm status (reference manufacturing) 0.0025 (0.0164) 0.0094 (0.0171) 0.0493 (0.0452) No. observations 521 505 261 No. observations 521 502 248 R-square 0.5119 0.4997 0.5872 Centered R- Square 0.4961 0.3223 0.3556 Weak identification test 21.901 [0.000] 9.881 [0.0091] 18.947 [0.0027] Hansen J statistic 6.375 [0.5928] 10.758 [0.2273] 11.040 [0.1905] Note(s): Standard errors within brackets, p-values within the square brackets, ***, ** and * indicate significance respectively at the 1, 5 and 10% level. The period of analysis is 2010–2013 Table 9. OLS and 2SLS regressions for business and investment climate in Yemen REPS 7,4 278 Panel A: OLS DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climateaccess to finance and credit 0.1484** (0.0624) 0.1011*** (0.0264) 0.0244* (0.0138) Business climateaccess to finance 0.1822** (0.0841) 0.3282* (0.1739) 0.1382* (0.0734) No. observations 7,952 7,761 7,252 No. observations 7,894 7,555 7,084 R-square 0.3292 0.2683 0.0435 Centered R-Square 0.1843 0.0830 0.0227 Weak identification test 13.142 [0.000] 10.800 [0.000] 12.164 [0.000] Hansen J statistic 12.443 [0.6131] 23.490 [0.2012] 20.022 [0.3192] Business climateaccess to land 0.0717*** (0.0244) 0.0386 (0.0311) 0.0169 (0.0155) Business climateaccess to land 0.1007** (0.0316) 0.1323 (0.3582) 0.0578 (0.0831) No. observations 7,864 7,743 7,226 No. observations 7,720 7,533 7,031 R-square 0.3309 0.2680 0.0381 Centered R-Square 0.1800 0.0892 0.0264 Weak identification test 15.88 [0.000] 6.525 [0.0042] 8.965 [0.000] Hansen J statistic 17.580 [0.2490] 24.417 [0.1807] 25.053 [0.1688] Business climatebusiness licensing and permits 0.1059** (0.0227) 0.1132** (0.0265) 0.0581 (0.0452) Business climatebusiness licensing and permits 0.1416* (0.0774) 0.1858*** (0.0288) 0.1293 (0.1084) No. observations 7,924 7,816 7,488 No. observations 7,771 7,601 7,223 R-square 0.3241 0.2563 0.0426 Centered R-Square 0.1821 0.0537 0.0192 Weak identification test 10.425 [0.000] 9.881 [0.000] 9.234 [0.000] Hansen J statistic 12.578 [0.6033] 18.583 [0.3908] 18.120 [0.4169] Business climatecorruption 0.2082** (0.0213) 0.2040** (0.0242) 0.0235** (0.0121) Business climatecorruption 0.5254*** (0.1459) 0.5678*** (0.1736) 0.1168* (0.0643) No. observations 7,982 7,849 7,521 No. observations 7,793 7,637 7,259 R-square 0.5119 0.2647 0.0427 Centered R-Square 0.1623 0.1059 0.0328 Weak identification test 17.092 [0.000] 11.934 [0.000] 18.767 [0.000] Hansen J statistic 19.411 [0.2479] 22.953 [0.2149] 19.086 [0.2642] Business climateelectricity 0.1595*** (0.0220) 0.0797*** (0.0260) 0.0115 (0.0136) Business climateelectricity 0.1871** (0.0882) 0.2196** (0.0959) 0.1101*** (0.0183) No. observations 7,991 7,822 7,539 No. observations 7,787 7,615 7,264 R-square 0.3297 0.2618 0.0412 Centered R-Square 0.1792 0.0695 0.0345 Weak identification test 16.268 [0.000] 16.602 [0.000] 15.705 [0.000] Hansen J statistic 24.738 [0.1845] 24.887 [0.1718] 21.135 [0.2733] (continued) Table 10. Individual obstacles in BIC pooling firms in 7 countries The business and investment climate nexus 279 Panel A: OLS DV: Logarithm of value added DV Labour productivity DV: Logarithm of TFP Panel B: IV DV: Logarithm of value added DV: Labour productivity DV: Logarithm of TFP Business climateinadequate education 0.1343** (0.0217) 0.0716*** (0.0259) 0.0286** (0.0137) Business climateinadequate education 0.1938* (0.1104) 0.1786** (0.0862) 0.0962* (0.0495) No. observations 7,984 7,802 7,584 No. observations 7,751 7,594 7,292 R-square 0.3229 0.2554 0.0427 Centered R-Square 0.1620 0.0113 0.0111 Weak identification test 7.444 [0.0025] 7.726 [0.0022] 6.835 [0.0035] Hansen J statistic 19.221 [0.3573] 17.264 [0.4687] 16.620 [0.5105] Business climatelabour regulations 0.1184*** (0.0222) 0.0530** (0.0258) 0.0205 (0.0139) Business climatelabour regulations 0.1660* (0.0903) 0.2142*** (0.0269) 0.1497 (0.1194) No. observations 7,957 7,807 7,532 No. observations 7,729 7,598 7,275 R-square 0.3214 0.2545 0.0426 Centered R-Square 0.1877 0.0344 0.0211 Weak identification test 11.430 [0.000] 10.759 [0.000] 10.505 [0.000] Hansen J statistic 28.207 [0.1298] 24.354 [0.1821] 23.251 [0.2071] Business climatepolitical instability 0.3152*** (0.0284) 0.2835*** (0.0336) 0.0416** (0.0181) Business climatepolitical instability 0.6485*** (0.1372) 0.7732*** (0.1606) 0.3450* (0.1859) No. observations 7,979 7,722 7,236 No. observations 7,736 7,492 7,024 R-square 0.3372 0.2712 0.0423 Centered R-Square 0.1881 0.0601 0.0331 Weak identification test 23.164 [0.000] 23.125 [0.000] 18.794 [0.000] Hansen J statistic 14.001 [0.5986] 20.224 [0.3104] 17.355 [0.4629] Business climatecompetition from the informal sector 0.0444** (0.0221) 0.0484* (0.0256) 0.0289 (0.0240) Business climatecompetition from the informal sector 0.0502* (0.0272) 0.1463 (0.1183) 0.1019 (0.0840) No. observations 7,986 7,726 7,434 No. observations 7,782 7,503 7,182 R-square 0.3327 0.2755 0.0428 Centered R-Square 0.1917 0.0940 0.0232 Weak identification test 18.728 [0.000] 17.391 [0.000] 16.370 [0.000] Hansen J statistic 22.499 [0.2277] 18.360 [0.4032] 20.717 [0.2896] Business climatetax rates 0.0418* (0.0230) 0.0294 (0.0261) 0.0480*** (0.0131) Business climatetax rates 0.1344 (0.0847) 0.5091** (0.2540) 0.0576** (0.0271) No. observations 7,960 7,835 7,571 No. observations 7,755 7,575 7,290 R-square 0.3223 0.2571 0.0433 Centered R-Square 0.1842 0.0602 0.0294 Weak identification test 12.464 [0.000] 11.749 [0.000] 12.746 [0.000] Hansen J statistic 17.346 [0.4635] 22.180 [0.2374] 19.778 [0.3303] Note(s): Standard errors within brackets, p-values within the square brackets, ***, ** and * indicate significance respectively at the 1, 5 and 10% level Table 10. REPS 7,4 280