uncorrelated with current capital stock (see equation (6)). If _ωit_ = _Ait_ + _ht_ ( _ρit_ ) as in the model setup above and, for example, firms with more foreigners are more capital intensive, then the coefficient estimate on capital in the production function will be biased.<sup>20</sup> To check whether our results are affected by this bias, we use the ACF approach and include the percentage foreign employees, _ρit_ , directly in the proxy function for TFP: _ωit_ = _m_<sup>_−_</sup> _t_<sup>1(</sup><sup>_kit, mit, lit, ρit_).</sup> Intuitively, it means that firms take into account the impact of foreign employment on production and thus the material input demand function is also a function of _ρit_ in addition to other inputs. ˆ We assume productivity still evolves according to a first order Markov process so: _ωit_ = _g_ ( _Ait−_ 1) + _ht_ ( _ρit_ ) + _ξit_ . Effectively we model the impact of foreign employment directly into the production function and not through the unobserved component of productivity. In practice, because this estimation procedure is much more data demanding, we assume that _ht_ is linear and only allow _ht_ ( _._ ) to change once with a dummy variable indicating the starting of the conflict. The effect of _ρit_ over time is estimated directly from the production function through _ht_ ( _ρit_ ). See Appendix A for more details on the exact estimation procedure.

# **5 Data**

Our analysis is based on firm-level data from the Registrar of Companies for the Modern Enterprise Sectors, collected by Cˆote d’Ivoire’s National Statistics Institute (INS), covering the universe of registered, formal modern enterprises for 1998-2003.<sup>21</sup> The unit of observation is the firm. Almost all firms in Cˆote d’Ivoire are single-establishment firms. The data set covers manufacturing, agriculture, trade and services The Registrar of Companies collects information upon incorporation including physical location, sector classification at the 3-digit industry level, and shareholdings for all shareholders. The INS requires all registered companies to submit annual filings with detailed financial and employment information including total wages, employee skill level, taxes paid, sales, and fixed assets, which are reported under the West African accounting system standards, Etats Financiers Normalises du Systeme Comptable Ouest Africain (SYSCOA). These firms, which operate in the formal economy, pay a range of taxes, benefit from bank finance and technical assistance, and are characterized as having more educated owners (Goedhuys and Sleuwaegen 2002, OECD 2004).

The structure of the data is an unbalanced panel. We define exit as a permanent exit from the data (We do not consider temporary lapses in reporting as exits). Entry can be defined unambiguously since we know the year when the firm starts operating. The reporting requirement constitutes an

> 20To see this, consider equation (5) above. The error term _ηit_ and consequently _φit_ will contain information on _ρit_ if it is not included in the proxy function _m_<sup>_−_</sup> _t_<sup>1.Asaresults,theerrorterm</sup><sup>_ξit_calculatedusing</sup><sup>_φ_ˆ</sup><sup>_it_willcontain</sup> information on _ρit_ . Therefore, the first moment conditions in (6) will not be satisfied if capital is correlated to foreign employment. For a more formal discussion of the problem, see Appendix A.

> 21Our panel is shorter than the typical sample length in the TFP literature. However, it is longer than most panels available in Sub-Saharan context. For example, Frazer (2007) uses a 4 year panel while Soderbom et al. (2006) and Van Biesebroeck (2005) both have a panel length of 3.

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