treated as exogenous _to the areas that the highway runs through_ ...This allows for a difference-in-difference estimation strategy, where changes in relevant outcomes for affected firms are compared to the corresponding outcomes for firms whose location precluded their directly benefiting from the highway program’<sup>56</sup> Datta argues that since the highway improvement program in question used the most direct routes between its destinations, and because no ‘opting out’ was possible and no realignments carried out, the areas _in between_ the destinations can indeed be viewed as a quasi-random selection of locations with existing highways to which the upgrade ‘treatment’ was applied. Datta finds that firms that profited from the upgrade held significantly lower inventories, became less likely to report transportation as a major or severe problem, and showed a greater propensity to change suppliers between the two years (suggesting they found more suitable ones). This is interpreted as evidence that ‘improved highways facilitated productive choices’, ‘eased the extent to...which transportation infrastructure constrains firms’ and allowed them to ‘produce more efficiently’<sup>57</sup> .

Papers that find no significant effects of infrastructure indicators on firm performance are in the minority, and generally have very specific samples or clear methodological limitations. For instance, Commander and Svejnar (2007) use a sample of BEEPS surveys (round II and III) to regress firm revenues on a number of controls and _subjective_ business climate variables, including a composite ‘infrastructure’ one based on the perceptions question reproduced in Box 1. They do find that perceived infrastructure constraints have a negative and significant effect on firm revenue – but only without controls for country fixed effects. The authors conclude quite generally that only country effects (due partly to differences in infrastructure, partly to other unobserved heterogeneities) have an impact, while within-country differences in infrastructure do not. However, this seems like a premature conclusion given the significant within-country effects found in many other studies, that the sample is limited to Eastern Europe and Central Asia and only subjective indicators were used.

Fisman and Svensson (2005) use an Ugandan dataset to test whether firm sales growth is explained by corruption and taxation, controlling for a number of variables including an composite index of ‘public services’ (electricity, water, telephone, waste disposal, paved roads). Although this index has the expected positive sign (a higher index number standing for better infrastructure), it is not individually significant.

# _Competition and Regulation_

The view that competition and entry should promote efficiency and prosperity ‘has now become...common wisdom worldwide.’<sup>58</sup> Generally speaking, this view would lead us to expect a positive effect of competition on firm performance, and a negative effect of (excessive) regulation. Studies based on business climate survey data have predominantly

> 56 Datta, S. 2008: 2-3. [Italics are the author’s]

> 57 _Ibid._ : 4 and 15.

> 58 Aghion and Griffith. 2005: 1.

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