variation in the mechanisms of corruption, or related to the somewhat different regression specifications).

An interesting result with respect to the sign of the coefficient of corruption indicators is provided by Aterido et al.’s (2007) analysis of employment growth in a very large sample of some 80 Enterprise Surveys. They find a significantly negative effect of their bribe dummy, as well as alternative corruption indicators, on the growth of small, medium and large firms. However, the coefficient is positive for micro-firms.<sup>86</sup> This probably indicates that micro-firms find it easier to escape the attention of corrupt officials and therefore tend to grow faster relative to larger firms if the industry-location averages of corruption are higher. In their study of the Chinese business climate, Hallward-Driemeier, Wallsten and Xu find that objectively measured corruption<sup>87</sup> matters ‘a great deal’ for sales growth. Reducing ‘the mean score of corruption by one standard deviation...has a positive effect on sales growth by...6 percentage points’.<sup>88</sup> However, no significant effect of corruption can be shown for other firm performance indicators such as productivity and employment growth. In Beck, Demirgüç-Kunt and Maksimovic’s (2005) main regression of sales growth on a number of controls and three summary subjective business climate indicators, corruption obstacles, unlike financing and legal ones, are not significant, although the coefficient does have the expected negative sign. The authors suspect this to be due to multicolinearity, in the sense that the ‘impact of corruption on firm growth is captured by the financial and legal obstacles.’<sup>89</sup> In an Eastern European and Central Asian sample, Bastos and Nasir (2004) also find a significantly negative effect of their ‘rent predation’ aggregate variable, which measures a combination of corruption and regulation. However, the rent predation variable explains less variation of productivity than the infrastructure and competition measures.

# **Section 3. Lessons and Ways Forward**

In the previous section, we have reviewed the results of firm-level studies that relate enterprise performance to various objective and subjective business climate indicators, along with a series of controls for variables such as firm characteristics, industry and country effects.

As has been seen, these studies have provided new evidence for one of the central assertions of the 2005 World Development Report, namely, that a good business climate ‘drives growth by encouraging investment and higher productivity’<sup>90</sup> At least four elements of the investment climate – infrastructure, finance, corruption and crime, and competition and regulation – have been shown to significantly impact firm performance.

> 86 Aterido, R., M. Hallward-Driemeier and C. Pagés. 2007: 22.

> 87 Their variable is the city-industry share of the corruption score, which is constructed as the principal component of two variables: the ratio of bribes to sales plus the share of contract value used as bribe to get a business contract 88 Hallward-Driemeier, M., S. Wallsten and L.C. Xu. 2006: 644.

> 89 Beck, T., A. Demirgüç-Kunt and V. Maksimovic. 2005: 151-153.

> 90 World Bank. 2004: 2 and 8.

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