climate as exogenous determinant of firms’ performance. As seen in section 3.3, however, this is not always the case. In order to address this issue, we have measured _IC_ variables as city or region-sector averages of firm-level observations. This has helped, as well, to increase the number of observations by integrating in the sample firms for which information is insufficient. This has been done for “Infrastructure” and “Business-Government Relations”. For “Human Capacity” and “Financing Constraints”, however, the initial indicators having been interpreted as specific to each firm, information has been kept at the firm level (except for the variable “Skill and Education of Available Workers”) . The initial _IC_ indicators are presented in _Annex 7_ , along with some information on firms’ characteristics. The figures highlight well, in average, MENA deficient investment climate, as well as the specificities of the industrial sector in the region.

# **6- Investment Climate: How Do MENA Economies Perform?**

Chart 1 in _Annex_ 8 confirms what we know of MENA investment climate. When MENA is compared to the non MENA countries of the sample, the region always ranks below. This is true for all four dimensions of the investment climate. MENA investment climate is in average of poorer quality than in East Asia ( _EAP)_ , Africa ( _AF)_ , Latin America ( _LA)_ and South Asia ( _SA_ ) -- except for the quality of infrastructures which appear as less a constraint than in this last region (see Chart 2 in _Annex_ 8). These findings, which are in line with the literature (see World Bank, 2005), can clearly be related to the disappointing firm productive performances assessed previously.

A more detailed analysis reveals, however, differences across countries and indicators. It is again _Morocco_ who seems to suffer the least from _IC_ limitations, except from financing constraints. Quality of infrastructures, business-government relations and human capacity inadequacies do not appear very much higher than in _South Africa_ , the country where firms’ productive performances are in average the highest (see Chart 3 in _Annex_ 8). On the opposite, firms in _Lebanon_ appear to face strong inadequacies in infrastructures and businessgovernment relations. _Egypt_ and _Saudi Arabia_ are in an intermediate position, with however relatively high deficiencies in the business-government relation, in particular in _Egypt_ . These results are also in line with our findings on firms’ productive performances (see section 3).

As far as the different dimensions of the _IC_ are concerned, a disaggregated approach shows which specific aspects are of more concern in the region. Limitations in all three components of the financing constraint demonstrate MENA deficit and cost of funding. This is also true for most dimensions of human capacity and of government-business relations (in particular the tax rate and administration, the labor regulations, and the licenses and operating permits, see Table 1 in _Annex_ 7). MENA deficient financial system, as well as firms difficulties (SMEs in particular) in finding affordable credit, are important aspects often emphasized in the literature, at the same time as the limitations of various dimensions of the business environment and the lack of training and expertise of the labor force<sup>35</sup> . As far as the quality of infrastructures is concerned, our results are more mitigated than usually highlighted in the literature. If MENA firms seems, in average, to face more constraints in electricity delivery (more enterprises rely on a generator), as well as in internet connection, quality of telecommunications and transports does not appear as very strong obstacles to operation (see Table 1 in _Annex_ 7). Although this finding looks somehow in contradiction with the conclusions of several studies, differences may be due to our small number of MENA countries, as well as to the presence of Morocco whose quality of infrastructures is not perceived as a strong limitation<sup>36</sup> . These results are confirmed at the country level, with 16