single salient measure of productivity (or _logTFPi_ ), any empirical evaluation of the productivity impact of INFs might critically depend on the particular productivity measure used. Escribano and Guasch (2005, 2008) suggested—following the literature on _sensitivity analysis_ of Magnus and Vasnew (2006)—to look for empirical results (elasticities) that are robust across several productivity measures. This is also the approach we follow in this paper.

In particular, we want the elasticities of INFs on productivity (TFP) to be robust (with equal signs and similar magnitudes) for the 10 different productivity measures used. Alternative productivity measures come from considering:

- Different functional forms of the PFs (Cobb-Douglas and Translog)

- Different sets of assumptions (technology and market conditions) to get consistent estimators based on Solow’s residuals, ordinary least squares (OLS), or random effects (RE), and so on

- Different levels of aggregation in measuring input-output elasticities (at the industry level or at the aggregate country level)

**Box 4.1 Summary of productivity measures and estimated investment climate (IC) elasticities**

|1. Solow ́s Residual|Two-step<br>estimation|1.1 Restricted coefficient<br>1.2 Unrestricted coefficient|1.1.a OLS 1.1.b RE<br>1.2.a OLS 1.2.b RE|2 (Pit) measures<br>4 (IC) elasticities|
|---|---|---|---|---|
|2. Cobb-Douglas|Single-step<br>estimation|2.1 Restricted coefficient<br>2.2 Unrestricted coefficient|2.1.a OLS 2.1.b RE<br>2.2.a OLS 2.2.b RE|4 (Pit) measures<br>4 (IC) elasticities|
|3. Translog|Single-step<br>estimation|3.1 Restricted coefficient<br>3.2 Unrestricted coefficient|3.1.a OLS 3.1.b RE<br>3.2.a OLS 3.2.b RE|4 (Pit) measures<br>4 (IC) elasticities|
|Total||||10 (Pit) measures<br>12 (IC) elasticities|

_Source:_ Author’s estimations. _Note:_ Restricted coefficient = equal input-output elasticities in all industries. _Unrestricted coefficient = different input-output elasticities by industry._ Box 4.1 summarizes the productivity measures used for the IC evaluation. The two-step estimation starts from the nonparametric approach based on cost shares from Hall (1990) to obtain Solow’s residuals in logs under two different assumptions:<sup>11</sup> (a) the cost shares are constant for all plants located in the same country (restricted Solow residual), and (b) the cost shares vary among industries in the same country (unrestricted by industry Solow residual). Once we have estimated the Solow residuals ( _logTFPi_ ) in the first step, in the second step we can estimate equation (4.3) by OLS with robust standard errors for the countries that have a single year of data (2006) on PF variables. For the remaining 14 countries and for the blocks of countries described in section 3, we can also estimate (4.3) by RE to obtain the corresponding IC elasticities and semi-elasticities,

> 11 The advantage of the Solow residuals is that they require neither the inputs (L, M, K) to be exogenous nor the input-output elasticities to be constant or homogeneous (Escribano and Guasch, 2005 and 2008). The drawback is that they require having constant returns to scale (CRS) and, at least, competitive input markets.

22