is to lower growth and performance. This is partly in line with previous research showing that where the business environment creates barriers to new business entry, incumbent firms show lower competitiveness (productivity) (Schivardi and Viviano, 2011); although their research showed incumbents benefited from higher profit margins, which we do not find to be the case in aggregate.

Table 6: Regression results – business environment on firm performance

||Sales Growth|Employment<br>Growth|Investment Rate|ROA|Productivity<br>Growth|
|---|---|---|---|---|---|
|SDB‐Start|‐0.042**|‐0.010*|‐0.509***|‐0.047***|0.00000|
||[‐2.567]|[‐1.774]|[‐4.949]|[‐3.166]|[‐1.246]|
|SDB‐Construct|‐0.010***|‐0.005***|‐0.071***|‐0.004***|‐0.000***|
||[‐6.581]|[‐5.999]|[‐6.660]|[‐3.974]|[‐3.171]|
|SDB‐Contract|‐0.280**|‐0.053|‐1.289|0.000|‐0.002|
||[‐2.293]|[‐0.858]|[‐1.211]|[0.004]|[‐1.074]|
|SDB‐DTF (inv)|‐2.380***|‐0.998***|‐17.431***|‐1.493***|‐0.019***|
||[‐6.419]|[‐5.923]|[‐6.636]|[‐5.519]|[‐3.124]|
|HHI|‐3.946***|‐1.124***|‐22.800***|‐2.760***|‐0.050***|
||[‐5.698]|[‐3.479]|[‐4.999]|[‐5.220]|[‐4.826]|

_Note: All models include fixed effects for: country, year, and sector; firm controls include: (log) age, (log) size, (log) total assets, assets per employee; and financial leverage. SDB‐Start is the number of days to start a new business, SDB‐Construct is the number of days to obtain a construction permit, SDB‐Contract is the number of days to enforce contracts. SDB‐DTF (inv) is the inverse of the distance to frontier index using all three indicators. HHI is the Herfindahl‐Hirschman Index of market concentration (country‐sector level) based on sales._ While results on delays in time to _enforce contracts_ are weaker, they still show a negative relationship between longer delays and performance across all variables other than profitability. However, the results are significant only for the relationship with sales growth. One possible reason for the weaker finding is that stronger contract enforcement matters less to some business activities than others. For instance, sectors that mainly use commodities as inputs such as steel and oil are less likely to lead to legal disputes about the value and pricing of purchased inputs; while sectors that use complex and differentiated inputs such as microchips are more reliant on the legal environment. As a result, weaker legal contract enforcement environments will result in closer relationships between corporate customers and suppliers whenever inputs are complex and differentiated, so to build reputation and trust; we call these inputs _relationship‐specific inputs_ (Crawford, 1990; Nunn, 2007).

Provided the higher contractibility of relationship‐specific inputs, we suspect that the performance of a firm is further affected by a weaker contract enforcement environment as the firm uses more relationship‐specific inputs. To test this hypothesis, we use an index constructed by Nunn (2007); the Nunn (2007) index is a sector specific measure of the share of relationship‐specific inputs used by firms in this sector. We introduce in our model a sector‐level dummy _High Nunn_ , which takes the value one if the Nunn (2007) index is above median. Above median sectors are relationship‐specific inputs intensive sectors and are considered to have ‘high contractibility’. We are specifically interested in the interaction term between the variables _SDB‐Contract_ and _High Nunn_ , which captures the effect of the contract enforcement environment in high‐contractibility sectors. Table 7 reports the results. We find that the impact of the SDB contract enforcement index (SDB‐Contract) is stronger in ‘high contractibility’ sectors (i.e., sectors using more relationship‐specific inputs). This supports our hypothesis that a weaker contract enforcement environment worsens the performance of firms using more relationship‐specific inputs.

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