Aterido, Hallward‐Driemier, and Pages (2009) perform a similar analysis on the relation between firm growth and investment climate using a more comprehensive dataset from Enterprise Surveys. They use data from over around 80,000 firms from 110 developing countries in seven different regions of the world. Their analysis shows that growth rate decreases monotonically as size increases. The results that are presented for Turkey in Table 12 and Table 13 are not in accordance with their findings.

# **6. Robustness**

Although averaging the firm level values of IC variables over industry‐region alleviates the endogeneity problem, it might not remove it completely. We perform the same regression analysis specified in equation 3 restricting the sample to panel firms. In the panel regressions, we use the values of firm characteristics and IC variables from the 2005 survey and analyze how these factors relate to firm growth between 2004 and 207. Here we cluster the standard errors at 2‐digit industry level.

Results of the regression for the panel data are given in Table 14. Despite of the small sample size of the panel data and the inclusion of the controls for IC variables, for most of the regressions, medium size firms have the lowest growth rate. On the IC variables, time to clear customs for both exporting and importing is negatively related to firm growth.

As an alternative to four size groups, we constructed three size groups measured as total full‐ time employment. In this grouping, size classes are **Small** : Size≤19, **Medium** : 20‐99, **Large** : ≥100. This is the classification used in Enterprise Surveys for stratifying the population of firms in size. In Table 15, for brevity, we only present the results that include external finance and line of credit as IC variables. These IC variables were the ones that had significant coefficients in the main regression results and they are the only variables that persisted to be significant in this alternative size grouping. In these regressions, the group of firms with less than or equal to 19 employees is omitted. The non‐monotonic decrease in growth rates as size increases is observable in this size grouping as well.

We also used several alternative definitions of growth rates. One is log of employment growth and another one is an extensively used measure of job creation and destruction. It is calculated by dividing the difference in employment levels over the past three years by the simple average of employment levels over the same period. This measure is bounded by values of ‐2 and 2 and provides more robust estimates to outliers. In either case the relation between size and employment growth was not sensitive to these alternative measures of growth.

The non‐monotonic decrease in growth rates could be affected by labor regulations. The stringent labor regulations can distort firm growth by increasing the opportunity costs of hiring. This could have the most negative effect on SMEs as these firms have neither the capacity of large firms nor the flexibility of micro firms to cope with the effects of these policies. The survey includes a question that asks the firm’s perception on how constraining labor regulations are to its current operations. Firm can choose one of the five options which are no obstacle, minor obstacle, moderate obstacle, major obstacle, very severe obstacle. I set a dummy variable equal to one if the firm’s response is major or very severe obstacle. Then following the same methodology applied to other IC variables, I average the value of this variable for all firms that responded at industry‐region level.

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