# II. Literature review and stylized facts of output, input, productivity, and business climate in Nigerian firms 2007-2014

## A. Literature review

The business environment or investment climate refers to a set of factors, policies and institutions that shape the opportunities and incentives for firms to invest productively, create jobs and expand (Aterido et al. 2011; World Bank., 2005). The literature reveals a consensus that good business environment fosters firms' growth, productivity and development, while adverse business environment increases firms' transaction costs and constraints on their development.<sup>1</sup> As highlighted by Dollar et al (2005), the investment climate matters for the level of productivity, wages, profit rate and the growth of output, employment, and capital stock at the firm level. A poor business environment reduces the opportunities and incentives for firms to invest productively, create jobs and expand. We focus in this paper on three specific dimensions of the investment climate: access to infrastructure, access to finance, and regulatory environment.

Well-developed infrastructure is essential to promote economic growth by reducing transaction cost for firms as well as for households. Indeed, infrastructure services like transport, energy, water and sanitation are used by firms in their production processes and delivery of goods and services (Bah and Fang, 2015). Moreover, well-developed infrastructure is an asset for the competitiveness of firms both at the national and international levels. In this vein, Bah and Fang (2015) argue that poor infrastructure in Africa increases transaction cost and makes African firms less competitive than their international counterparts. In Africa, as in the other developing countries, the costs of transportation, logistics, telecommunication, water, electricity, security and bribes are high, and firms suffer great losses due to transportation problems, power and water outages and crime (Eifert et al, 2005). Poor infrastructure creates barriers to opportunities and increases costs and risks for small firms as well as multinationals (World Bank, 2005) by limiting market access, shrinking the size of the available market and reducing productivity. Eifert et al (2005) show for instance that a substantial portion of the variance in measured productivity between China and several African countries can be attributed to infrastructure and logistics-related losses rather than their intrinsic capabilities. Good infrastructure connects firms to their customers and suppliers and helps them take advantage of modern production techniques (World Bank, 2005). In Nigeria, as in other African countries, poor quality of infrastructure characterized mostly by frequent power outages, insecurity, and bribery negatively impacts firms’ performance and reduces the incentive to invest productively.

A branch of the literature focuses on the effects of credit and liquidity constraints on firms' performance. Rajan and Zingales (1998), one of the first to analyze this relationship, highlight that

> 1 World Bank (2005); Dollar et al., (2006) and Atérido et al (2011) for more extensive discussion.

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