differences across countries in institutions like product and factor regulations, or in the fiscal policy (e.g., Kumar et al, 1999).<sup>5</sup> However, in our empirical analysis, we will always _condition_ on country and sector heterogeneity and thus only explore within country and sector variation across firm size. Moreover, we will also test the robustness of our findings to when exploring variation within country, sector and city.

Second, even though our main empirical findings survive a battery of tests, we cannot ultimately rule out that the positive correlation between firm size and the investment in job training is driven by a reverse causality argument. In particular, this will be of greater concern if one thinks that the explanatory variable (firm size) is a leading indicator – not a causal indicator – of the firm’s investment in job training.<sup>6</sup> However, it is reassuring to see that the differential in the investment across firm sizes is robust to several cuts in our sample as well as to the control of many firm observed characteristics (e.g., managerial education, contract structure within the firm or perceptions of the economic uncertainty) or unobserved country-sector and city variables.<sup>7</sup> The findings in this paper have important policy implications for the design of policies supporting the investment in job training among SMEs in the developing world. Even though our evidence is supportive of quantitatively important differences across firm sizes, these differences are not primarily explained by variables closely linked with important market imperfections. We argue that the differences in the expected return of 5 In developing countries, several regulations tend to favor the existence of micro or small firms because they apply only to firms above a certain employment threshold. Kumar et al (1999) explain differences in firm size across countries with the role the institutions such as the judicial and the financial systems.

6 If the direction of causality runs from the investment in job training to larger firm size, and if the decision to invest in job training is persistent over time, then the positive correlation between firm size at a point in time in the and the investment in job training after that could be due to the fact that the firms investing more in job training subsequently had already larger firm sizes in the previous period. This would thus induce an _ex-post_ correlation in the data. We argue that this is a source of small concern because the question posed to firms refers to job training taking place over the last two years, while firm sixe refers only to the previous year.

> 7 Unfortunately, for most countries in our sample the _Enterprise Surveys_ lack longitudinal information on the investment in job training. Thus we will not be able to account for firm heterogeneity in unobservable factors by exploring time series variation in the investment in job training. Nevertheless, we conjecture that the availability of a short panel of data would not be of much help given the likely persistency in the job training investment. This would naturally limit the explanatory power of exploring changes in the intensity to train (see e.g., Dearden et al, 2005).

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