that perform above the average in their countries tend to report bigger constraints than their poorly-performing compatriates. The scale of this problem is reduced when countryaverages are used; it is unlikely that a country in which the average firm is high productivity is therefore more likely to be a country in which the average firm will perceive greater investment climate obstacles.

The BEEPS and PICS datasets have a very rich set of investment indicators, and the question is how to make use of them. Two sets of investment climate indicators were used. The first set was the simple country-survey-average of each of the raw indicators reported by firms, scaled from 1 (no obstacle) to 4 (major obstacle). These variables are those in the block of questions used in the factor analysis reported in the previous chapter. The second set used sets of indicators corresponding to aspects of the investment climate, combined (e.g., a single “finance” indicator was created using the responses to questions about financial access and cost of finance). The other combined indicators were for infrastructure, taxation, regulation, the macroeconomic environment, and property rights (corruption and crime). These were scaled to be comparable to the raw data on perceived business obstacles (the minimum was 1 and the maximum was 4). In addition to augmenting the country-survey-averages regression equation (2) with the average investment climate variable, country-survey-averages of ownership variables (privatized, new private, foreign owned) and export orientation were also included. The analysis was conducted on 50-51 country-survey-averages based on about 14,000 firms from manufacturing, services and construction; the analysis separating manufacturing and services firms yielded similar results.

In these TFP estimations most of the investment climate measures in the regressions were insignificant, with one very clear and consistent exception: infrastructure constraints generate lower TFP, with an estimated coefficient of about –0.7. Countries in which firms complain a lot about infrastructure are, ceteris paribus, countries with less productive firms. The infrastructure constraints are: (i) access to telecommunications, (ii) access to electricity and (iii) access to land. These results are similar to Dollar et al. (2003) who find in a sample of 4000 firms in Bangladesh, China, Ethiopia and Pakistan that the significant investment climate indicators that affect TFP are power losses and telephone constraints<sup>17</sup> .

# **What types of firms report investment climate constraints?**

The previous section pointed out that what firms report about the investment climate constraints they face is determined in part by the characteristics of the firm. This section, on the other hand, explores what types of constraints various types of firms face.

A simple and straightforward approach<sup>18</sup> consists of splitting the sample of firms into groups according to the characteristics that affect performance in the regression analysis above or according to their actual economic performance, and identifying the differences in various groups of firms’ perceptions of the investment climate. Thus, for example, it is possible to group firms according to their ownership, and ask whether privatized firms, 10