# **Firms’ Productive Performance and the Investment Climate in Developing Economies: An Application to MENA Manufacturing**

# **1- Introduction**

Recent developments of the economic literature have put the investment climate at the center of economic performance. It is now well documented that the investment climate can significantly affect investment, productivity, and growth<sup>1</sup> . A growing literature suggests, in particular, that successful market-based economies need good governance institutions<sup>2</sup> . Governance exerts a strong influence on the investment climate. On the empirical side, several studies have related economic performances to different measures of governance<sup>3</sup> . The role of security of property rights is one of the best documented and supported by the data<sup>4</sup> . Some authors have also tested the role of corruption<sup>5</sup> and, to a lesser extend, regulation<sup>6</sup> and bureaucratic quality<sup>7</sup> . More recently, the literature has evaluated firm performance and its determinants using enterprise surveys data<sup>8</sup> . This approach, still quite new, aims at strengthening the institutional literature by providing microeconomic foundation.

Investment climate is defined by the World Bank as the policy, institutional and regulatory environment in which firms operate (see World Bank, 2005). Key factors affecting the investment climate are corruption, taxation, regulatory framework, quality of bureaucracy, legal environment, availability and quality of infrastructures, availability and cost of finance, factor markets (labor and capital), technological and innovation support. A good investment climate reduces the cost of doing business and leads to higher and more certain returns on investment. The forward- looking nature of investment underlines the importance of a stable and secure environment. A poor investment climate is also seen as constituting barriers to entry, exit and competitions. The World Bank (2004) reports as well that a better investment climate improves bureaucratic performances and predictability, and contributes to the effective delivery of public goods that are necessary for productive business.

In MENA, various studies point out the deficiencies of the investment climate. This is the case of the World Bank (2004) for governance, as well as of country studies based on enterprises surveys, in particular the World Bank Investment Climate Assessments ( _ICA_ ) of _Egypt_ (2005 and 2006), _Morocco_ (2001 and 2005), and _Algeria_ (2002). _Doing Business_ (World Bank, 2009) also places MENA low on business climate indicators<sup>9</sup> . These deficiencies have been reported as contributing to the poor economic accomplishment of the region<sup>10</sup> . Although MENA countries are, in average, defined as middle income-economies, growth and investment performances in particular have been disappointing for more than three decades<sup>11</sup> . Attractiveness to FDI has also been weak, as well as competitiveness and exports of manufacturing<sup>12</sup> . MENA competitiveness has constantly been affected by poor exchange rate policies and insufficient economic reforms. But other factors, such as the investment climate, can also explain the low productivity and the high production costs at the firm level _._ The World Bank Investment Climate ( _ICA_ ) surveys collect data on inputs and outputs, as well as on various aspects of the investment climate at the firm level. _ICA_ surveys produce both subjective evaluations of obstacles, as well as other more objective information with direct link to cost and productivity on the themes of infrastructure, human capital, technology, governance, and financial constraints. These standardized surveys of large samples of firms from different sectors permit comparative measures of firms’ productive performance. They also provide information to estimate the contribution of investment climate to these 2