new private firms, or state-owned firms, perceive infrastructure as a major constraint; or they can be grouped according to their estimated TFP or employment growth rates, and the same question asked. The main idea of the approach is to identify the differences in the investment climate faced by good performers versus that faced by bad performers.

This section takes the analysis a step further and uses regression analysis to answer the question: compared to other, similar, firms in the same country, what types of firms report significant investment climate constraints? The advantages of using a multivariate regression framework are that it allows for formal statistical testing, and it controls for multiple characteristics of firms simultaneously.

Reverse causality is also an issue here. It is possible that better performing firms will report that they are more likely to face certain constraints, but it is also possible that the causality can run the other direction: firms that are particularly constrained may suffer in their performance. Nevertheless, in the results reported below it is usually possible to identify which channel dominates. The reason is that when causality runs from the investment climate to TFP and other performance measures, we expect bigger constraints to generate lower performance (i.e., there will be a negative coefficient on the investment climate constraint measures). When, however, causality runs from performance measures to the perceived investment climate constraints, we expect better performance to generate higher reported IC constraints (i.e., there will be a positive coefficient, because rapidly growing, high productivity firms are more likely to be constrained). The exception to this is financial constraints, where poorly performing firms are if anything more likely to report that they are short of money than growing, profitable ones.

Thus for most constraints, the two effects work in the opposite direction of each other, and if we find coefficients that are significantly different from zero, this will tell us which effect dominates in the data. In fact, the second channel usually dominates: the coefficients are usually positive, meaning that better performing firms face bigger constraints. The exception also fits with the priors expressed above—poorly performing firms report bigger financial constraints.

**_International evidence._** The main results from the 51 PICS and BEEPS surveys are summarized as follows:

- Privatized and especially new private firms perceive greater business constraints practically across the board compared to similar state-owned firms in the same country.

- Foreign-owned firms also generally perceive greater business constraints, except for constraints related to finance and crime, about which they complain less than domestically-owned firms.

- Exporters state they face greater constraints from infrastructure, skills shortages and regulation (especially, and not surprisingly, customs regulations), and complain less about crime, than do comparable non-exporting firms.

- Large firms complain more about infrastructure, regulation, and skills shortages, and less about financial constraints, than do smaller firms.

11