Finally, the data from SDB are available only for the single year in which they have been collected. This has important limitations for the analysis presented in this paper. First, because we run only cross‐ sectional regressions, the results show only correlation; we are unable to claim any causality. So, while we argue that the business environment impacts firm performance, it may also (or alternatively) be the case that firm performance impacts the business environment. This may be the case, for example, if well‐performing firms were more likely to demand efficient service from their local authorities. Perhaps a more important limitation is the fact that with most of the regions we are measuring firm performance over a longer, and critically in an earlier, period than we are measuring the business environment. One might imagine that there should be some lag between the business environment a firm faces and their performance in terms of growth and investment (if not necessarily productivity). Thus, if we measured performance by looking at a 3‐year average of 2013‐15, we would ideally want business environment measured prior to 2013. We get around this problem somewhat by focusing the analysis only across regions _within_ countries. Still, in the absence of data from earlier years (except in Italy where the data come from 2013), we are forced to make the assumption that the relative differences in the business environment across regions within each country have remained stable. Besides we are not aware of any major reforms in these countries in the period of study so that it is unlikely that the business environment variables we consider have varied substantially.

# 3. Do firms perform worse in lagging regions?

In this section we compare the performance of firms located in lagging regions versus those located in non‐lagging regions across Italy, Spain, Poland, and Romania. At this stage we are not considering the business environment but simply assessing whether there is an association between firm location and firm performance. Annex 3 provides details of country‐level results and differences between lagging and non‐lagging regions across the main performance variables. Figure 1 provides an illustrative summary of how firm performance differs across region types in each country. This is a simple difference in averages of single year observations with no firm, sector, or year controls.

Two results stand out in Figure 1. First, there are differences between the ‘low growth’ (Italy and Spain) and the ‘low income’ (Poland and Romania) regions. In Spain and Italy, firms in lagging regions have lower performance across all performance variables, while in Poland and Romania, firms in lagging regions outperform those in non‐lagging regions across many variables. This difference in performance of lagging region types is, perhaps, unsurprising, as ‘low growth’ regions by definition are operating in an environment where the regional economy of the lagging regions is growing more slowly than that of the non‐lagging regions. By contrast, firms in ‘low income’ regions are operating in an environment where income is lower but where growth is higher.

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