20 firms in step 4 that discovered new industries successfully by themselves, the government may award them with special recognition for their contributions to the country’s economic development.<sup>43</sup> The industries identified through the above process should be consistent with the country’s latent comparative advantage. Once the pioneer firms enter successfully, many other firms will enter these industries as well. The government’s facilitating role is mainly restricted to provision of information, coordination of hard and soft infrastructure improvement, and compensation for externalities. Government facilitation through the above approach is likely to help developing countries tap into the potential of the advantage of backwardness and realize a dynamic and sustained growth.

# **_Possible Ways of Identifying Binding Constraints_**

The facilitation of industrial growth has been the subject of a rich body of research and several approaches have recently been suggested by various authors.<sup>44</sup> While all these suggested approaches are likely to yield useful results, none of them focuses specifically on the identification of industries in which a developing country may have latent comparative advantage. The intellectual legacy of the failure of industrial policies based on development strategies that were inconsistent with comparative advantage has certainly led many economists to conclude that it may be impossible for any government to successfully “pick winners”.

In the absence of a framework for industrial identification, the existing literature has been limited to exploring ways of improving the business environment and infrastructure, which indeed affect firms’ operations and transaction costs. There is a robust empirical knowledge based on quantitative data on firm performance and perceptions-based data on the severity of a number of potential constraints facing firms in the developing world. It points out that in most of SubSaharan Africa, firms, for instance, tend to consider many areas of the investment climate major obstacles to business development and the adoption of more sophisticated technology. Finance and access to land seem to be areas of particular concern to smaller firms; larger firms tend to perceive labor regulations and the availability of skilled labor as the main constraints to their activity; firms across the board are concerned about corruption and infrastructure—especially network utilities such as electricity, telecommunications, transportation, and water (Gelb et al. 2007).

Despite their usefulness, investment climate surveys, which try to capture the policy and institutional environment within which firms operate, can be misused or misinterpreted. Just as individual perceptions of well-being are subjective and do not necessarily correlate with objective measures such as income or consumption, firms’ perceptions of binding constraints to their development often differ from actual determinants of performance. This limitation is due to the very nature of the investment climate data and the way it is often used. In a typical survey, the managers of a sample of firms are asked to rate each dimension of the investment climate (such as “infrastructure,” “access to financing,” “corruption,” etc.) on a scale of 1 to 4,

> 43 We owe this ex post reward idea to Professor Shang-jin Wei. 44 See for example Di Maio (2008) and Agosin et al. (2009).