employment in modern tradable services and non-textile and apparel manufacturing and a need for more increases in TFP across all sectors.

Underlying this cross-sectoral resource reallocation are patterns of enterprise dynamics that include a changing size and regional distribution of firms, and an increase in the number of firms and participation of workers in export processing zones (EPZs). Figure 3, based on manufacturing establishments, highlights: a shift between 1993 and 2007 in the number of establishments and employment shares from smaller firms (less than 40 employees) to medium and large firms (panel A); a shift in the number of establishments and employment shares from Central and Uwa regions to North-Central, North-West and Western regions (panel B); an increase in total employment in EPZs from 24 to over 100 thousand between 1983 and 2003 (panel C); and an increase in employment and export shares from roughly 4 and 8 percent in 1983 to over 9 and 30 percent by 2003.

# **IV. Empirical Approach for Productivity and Innovation Analyses**

# **Subjective and objective indicators affecting performance outcomes**

A commonly-used metric to assess the severity of business environment constraints has been the percentage of firms that subjectively report a given constraint as ‘major or severe’ to their business operations. Corruption, electricity and political instability are typically top bottlenecks affecting business operations as reported by enterprise managers across South Asian countries.<sup>4</sup> Figure 4, panel A illustrates the ranking of constraints as perceived by manufacturing firms between 2003 and 2010, ranked by top perceived 2010 constraints. Interestingly, while electricity has remained the top subjective constraint (for 42 percent of firms in 2003 and 36 percent in 2010), followed by tax rates (up to 29 from 19 percent), inadequately educated labor (up to 27 from 22 percent), access to financing (up to 25 from 20 percent), and tax administration (up to 22 from 13 percent); political instability is no longer in the top five, falling from 34 to 14 percent of respondents, while corruption fell from 17 to 8 percent of respondents. Figure 4, panel B reports the ranking of constraints as perceived by manufacturing versus service firms in 2010 (no service establishments were sampled in 2003). The largest differences in ranking of ‘major or severe’ constraints between manufacturing and service firms concern electricity (33 percent of manufacturing respondents versus 19 percent of services respondents, a difference of 14 points), access to financing (the most important perceived constraint for manufacturing, 12 percentage points higher than for services firms), inadequately educated labor (again ranked more problematic for manufacturing than services firms), and access to land (the most important perceived constraint for services, 8 points higher than for manufacturing firms). It is difficult to draw actionable policy recommendations from these data, however, as there is a natural tendency for managers to focus on such external-to-the-firm factors rather than possibly more important shortcomings related to a lack of ability to tap global knowledge flows, insufficient in-service

> 4 These were the top 3 subjective constraints across South Asia region countries, as reported in Dutz, O’Connell and Tan, 2011.

8