account for the large majority of all firms. Moreover, while many of the regulations and policies that make up the so‐called ‘business environment’ are – from a _de jure_ perspective – nationally determined and thus uniform across the country, their impact may vary significantly across regions, for several reasons. First, the implementation of national regulations may vary significantly across regions, both due to differing interpretations of laws and regulations as well as differing capacities (and incentives) of local authorities responsible for implementation. Second, even with no variation in regulations or their implementation, national regulations will affect regions differently. For example, it has been shown that product market regulations in the wholesale and retail trade sector impact productivity growth more negatively in lagging regions (European Commission, 2017).

Another reason why research on the impact of the regional business environment has received less attention is because of limited availability of data on both the regulatory environment and firm performance. That said, several authors exploit uniquely available data and, typically, unique policy situations that allow for analyzing a natural experiment at the local level. For example, Bertrand and Kramarz (2002) assess how zoning regulation on retailers impacts local employment growth in France. And Bruhn (2008) exploits a time‐varying municipality‐level rollout of business registration reforms in Mexico to assess their impact on firm entry and employment growth. More recently, Bianco and Bripi (2013) take a similar approach to look at the regional impact of business registration reforms in Italy.

In this paper, we explore the relationship between the regional business environment, lagging regions, and firm performance in four countries, namely Italy, Poland, Romania and Spain. In fact, the European Commission – DG REGIO defines two types of lagging regions: i) ‘low income lagging regions’: regions of new entrant countries with GDP per capita below 50 percent of the EU average [most of the regions in Poland and Romania]; and ii) ‘low growth lagging regions’: regions of long‐standing members where GDP per capita is below 90 percent of EU28 average, and have not converged towards EU average over the past decade [some regions in Italy and Spain]. Arguably, only the latter regional type conforms to the generally understood definition of ‘lagging.’<sup>5</sup> The analysis builds on an innovative data set of _Subnational Doing Business_ (SDB) indicators produced by the World Bank. This paper focuses on three SDB indicators that provide an objective assessment of the quality of the business environment, namely: the number of days to start a business; the number of days to obtain construction permits; and, the number of days to settle commercial disputes through courts. The three indicators are constructed for regions in Italy, Poland, Spain, and Romania. For identification purpose, it is important that each of these countries includes both lagging and non‐lagging regions. We combine SDB regional indicators with micro‐firm financial data obtained from Bureau Van Dijk’s _Orbis –_ a comprehensive database of financial statements of companies worldwide. We focus on four firm performance measures, namely: sales growth; employment growth; return on assets; and productivity growth.

This paper aims to answer four research questions: _1. Do firms perform worse in lagging regions?_ The hypothesis is that firms underperform both at the extensive margin (entry‐exit) and the intensive margin (incumbent growth), at least in low growth lagging regions. In this paper, we test only relationships at the intensive margin because we could not rely sufficiently on entry‐exit information in Orbis to conduct tests of the extensive margin relationship. We construct two separate samples of firms that reflect ‘lagging’ definitions.

> 5 The Merriam‐Webster dictionary defines “to lag” as: i) to stay or fall behind; ii) to move, function, or develop with comparative slowness; to become retarded in attaining maximum value.

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