A text by Alan Gelb

Vijaya RamachandranManju Kedia Shah

Ginger Turner

Presented by Marisha Tardif

and Rebekah Sundin

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This paper explains the factors that influence firms perceptions and compares firm perceptions to actual data. The research concludes that there are some causalities, dependent on country-level and firm-level variations in investment climate. But there isn’t any one binding constraint, rather there exists groups of constraints depending on the most important causality - income-level of the country.

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I. IntroductionII. Firm Perceptions of the Investment

ClimateIII. Methodologies and Description of TermsIV. What do Perceptions tell us? V. Constraints in Enterprise SurveysVI. Firm level analysisVII. Significant RegressionsVIII. ConclusionIX. General Policy Directions

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The authors review and discuss the World Bank’s Enterprise Survey database, with the aim of discovering the perceived obstacles African firms face in the Sub-Saharan region.

Firms rate external and internal investment climate constraints in 26 African countries.

The goal of the text is to serve the purpose of an aide to governments cooperating with businesses, and eventual policy reform in the area for an improved business and investment climate.

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The authors talk about perceptions-based data, however one must carefully consider it before using it to evaluate constraints which firms face.

The problem is that there is no real ‘benchmark’ to set the standard for all- not all problems bear the same weight across the differing countries. Various events and phenomena, and their severity may also have a significant influence on a firm’s standards. A constraint to business may also earn seriousness in comparison to other threats, as oppose to when it stands alone.

Authors discuss the importance of a firm being able to distinguish external from internal constraints. What may seem initially like an external problem may be due to inefficiency on the internal level.

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Can finance be secured?

Is there a reliable power supply?

Can premises be secured?

Can the firm plan ahead?

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The Enterprise Survey

As always in research, there is the possibility of questions being framed in such a way that they influence responses toward one side or another are of great concern.

Questions on research gathering. The wording of a question will without a doubt influence the answer it aims to draw from a participant. The way the participant is asked to engage in the survey is also of importance, for example, rating constraints on a scale, or ranking them.

Once again, the issue of a benchmark arises concerning finding a consistent example on which to base severity of a constraint. What is a low standard in one country may be acceptable in another.

DO FIRM’S VIEWS ACTUALLY REFLECT THEIR EXPERIENCES? Are constraints as binding as firms perceive them to be?

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The results prove that a pattern may be observed. Power supply and finance are concerns typically associated with low levels of income, corruption dominates at middle levels, and bureaucratic and regulatory issues prove the biggest challenges for the high income. This divides our analysis into three sections

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B. Income level B. Income level restraintsrestraints

for example, for manufacturing firms

primary concern is electricity. Macroeconomic instability Access to finance Access to land, but more an

infrastructure point of view than an actual issue of scarcity.

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Corruption Tax rates and administration Crime and security The problem of weak governance and low

administrative and bureaucratic capacity Capacity of state to provide certain

services

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(once basic fundamentals are given for a firm to conduct business)

labour regulation skill shortages (shortage of skilled labour) competition as a policy priority amongst

other policy goals

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Size of the firm Is it an exporting or importing firm? Is the firm locally-oriented, or foreign-

oriented? Is it foreign-owned, or domestically-owned? Which sector is the firm involved in? Are the individual experiences which may

shape opinions about a constraint? Perceptions Geographic location Popular opinion about the investment climate Media reports

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There is no ‘one size fits all’ solution to eliminating the constraints discussed in this paper.

Business climate reform efforts must be complimentary to each other, and be implemented across a broad front.

Infrastructure Regulatory reforms Monitoring service delivery Cooperation of firms

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There is also the issue of a barrier to growth. As a firm seeks to expand, it must take into consideration potential revenues measured against the high costs of constraints, for example increased exposure to regulation processes, skill shortages and other issues associated with an increase in visibility as a firm, and size. Here lies the trade-off.

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Binding constraintsBinding constraints

The constraints place a barrier on a firm’s potential for growth, as well as its aim of eventual visibility and thus wider market reach. The company suffers not only from additional input costs, but also from lost sales. It also discourages foreign investment.

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For the case of power shortages, some firms will purchase back-up generators, which are not only costly in themselves, but also quite expensive to run. Even when a tentative solution has arisen, the problem or power shortages still remains as serious as it was prior to the purchase of a generator.

Firms recognize a constraint even if it is possible for them to adapt to it!

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The paper concludes perception data is relevant to understanding the investment climate of a given country. The authors conclude that the results shown are a “useful first step in the business-government consultative process and help in prioritizing more specific behavioral analysis and policy reforms.”

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Provide basic infrastructure Upgrade human capital (training and

education) and progression of social policies

Policies to stimulation innovation Reduce market failure holding back

development? Despite each income category having

specific concerns, they are interlinked

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