Firms, Growth and the Investment Climate Mark Schaffer CERT, Heriot-Watt University

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Firms, Growth andthe Investment ClimateMark
SchafferCERT, Heriot-Watt University
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Outline of talk

• What is the investment climate? (IC)
• Enterprise restructuring and performance lessons
  from 15 years of transition
• The IC and the growth of firms
• Findings from a study of 50 transition and
  developing countries for the Serbia ICA (joint w/
  I. Goldberg and B. Radulovic)

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What is the investment climate?(Alternatively
business environment)
One critic writes
You might as well say the investment climate
will be stormy in the morning, gradually clearing
by mid-afternoon with scattered expropriations.
NB curiously, the identity of the critic isnt
clear. Bill Easterly is the author of the
paper...
and appears as such in the published version...
but in the working paper, the quote is
attributed to The President of the World Bank,
April 2002.
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What is the investment climate?(Alternatively
business environment)
But this scepticism is unfair.

• The investment climate/business environment is
  the environment in which firms operate
• Macroeconomic environment
• Infrastructure
• Competition
• Regulation
• Crime, corruption
• etc.

gt importance of economic institutions
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What makes firms in transition economies adjust,
restructure and grow?

• Traditional distinction between types of firms in
  transition economies
• State-owned firms (SOEs)
• Privatised firms
• New private firms

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Performance of SOEs in transition economies

• SOEs engage in passive restructuring
• Fall in output, change in product mix
• Gradual labour shedding, downsizing
• Wage restraint
• Basic cash flow management

but not deep restructuring. Downsizing but
not growth.
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What makes SOEs in transition economies adjust
and restructure?

• Competition
• Hard budget constraints
• Good business environment

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Performance of privatised firms in transition
economies

• Initially, privatised firms look like SOEs
• Passive restructuring
• In longer term, get 3 kinds of outcomes
• Continued passive restructuring
• Deep restructuring (good)
• Looting and collapse (bad)

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What makes privatised firms in transition
economies adjust, restructure and grow?

• Competition
• Hard budget constraints
• Strong outside ownership, e.g., concentrated
  ownership blocs, foreign investors
• New management, i.e., new human capital
• Good business environment, esp. corporate
  governance framework and property rights
  protection (otherwise gt looting)

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Performance of new private firms in transition
economies

• The initial engine of growth (Poland, China)
• Very strong performance - many startups, though
  also many exits
• Major source of job creation
• Why so strong?
• Entrepreneurship, new human capital
• Property rights and corporate governance

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What makes new private firms in transition
economies grow?

• Competition (easy)
• Hard budget constraints (also easy)
• Strong ownership (very easy)
• Good business environment (hard), esp
• Ease of entry
• Protection of property rights
• No Grabbing Hand of the State

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Lessons and surprisesfrom 15 years of transition

• Relatively few qualitative surprises
• The private sector expected to lead growth
• Macro stability promotes growth
• Market forces can work
• ...etc.
• All this and more was believed in 1989 and is
  still believed today.

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Lessons and surprisesfrom 15 years of transition

• Quite a few quantitative surprises
• Depth and length of the recession
• Time needed for privatised firms to turn round
• Importance of the new private sector
• Market forces can work ... perversely on a
  large scale in a poor IC (e.g., corruption)
• Importance of market-enabling institutions and
  the business environment/investment climate

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The investment climate and the productivity and
growth of firms

• World Bank and EBRD Investment Climate - Business
  Environment surveys (PICS, BEEPS)
• Firms asked to rate aspects of their IC/BE
• Goal 1 Learn about countries
• Goal 2 Learn about firms, IC/BE, growth

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The investment climate and the productivity and
growth of firms

• Typical IC/BE survey question (scale 1 to 4)

• How much of a problem is X for the operation and
  growth of your business?
• Macroeconomic stability
• Skills shortages
• Customs regulations
• Corruption
• Access to finance
• etc.

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The investment climate and the productivity and
growth of firms

• Usefulness of the climate metaphor
• Surveys provide info about the country IC
• Ex customs regulations are rated a bigger
  problem in country 1 than in country 2
• Surveys also provide info about the firm and the
  micro climate it faces
• Key point the obstacles reported by the firm
  also depends on the characteristics of the firm.

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Meet Joe Btfsplk
Joe Btfsplk is a character from an old American
cartoon, Lil Abner
Nothing ever goes well for Joe
Indeed, he carries his climate around with him.
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The investment climate and the productivity and
growth of firms
Serious point what firms report as their IC
tells us about what kinds of firms they are.
What aspects of the IC do growing, investing
firms say restrict their business? gt Policy
should reduce these constraints
What aspects of the IC do poorly performing
firms say restrict their business? gt Beware
reducing these constraints!
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Productivity, Ownership and the Investment
Climate

• Authors Itzhak Goldberg (WB), Branko Radulovic
  (WB), Mark Schaffer (CERT)
• Prepared for the WBs Investment Climate
  Assessment (ICA) for Serbia.
• Based on survey data from 27,000 firms in 50
  countries, 26 transition economies and 24
  low/middle income market economies
• gtWe ask Is Serbia different?

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Research strategy
Same two questions, prefaced by a third
1. What are the characteristics of growing,
investing firms?
2. What aspects of the IC do growing, investing
firms say restrict their business? gt Policy
should reduce these constraints
3. What aspects of the IC do poorly performing
firms say restrict their business? gt Beware
reducing these constraints!
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1. What are the characteristics of growing,
investing, high productivity firms?
Answers no surprises. A sample

• New private firms faster employment growth, more
  investing, etc.
• followed by privatised firms
• Foreign-owned and exporting firms have higher
  productivity
• Is Serbia different? No.

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2. What do growing, investing firms say
restricts their business?
Answers various. A sample

• New private and investing firms complain about
  corruption and excessive regulation
• Foreign-owned, exporting and new private firms
  complain about infrastructure
• High employment-growth and investing firms
  complain about skills shortages
• Is Serbia different? No.

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3. What do poorly performing firms say restricts
their business?
Answer simple.

• Low-productivity firms,
• Labour-shedding firms, and
• Low-investment firms...
• all complain about availability of finance.
• gt Be careful about trying to make this aspect of
  the IC more friendly!

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Firms, Growth andthe Investment ClimateMark
SchafferCERT, Heriot-Watt University