The empirical exercise also indicates that, except for the Non-metal Mineral sector, the productivity of Turkish industrial sectors is positively correlated with the number of firms operating in the same sector, that is, the size of these sectors matter for a sustained industrial growth. Indeed, when firms operating in the same sector a geographically close to each other, the common knowledge of best industrial practices is spread by the formal and informal interactions between workers living in the same neighborhood, hence improving the productivity of the firms.

A business environment facilitating business creation and attracting qualified workers seems to be essential in sustaining the productivity of Turkish manufacturing sector. The 2007 Doing Business report ranks Turkey 91 out of 175 on overall ease of doing business, the three worst ranking being on dealing with licenses (148/175), employing workers (146/175) and closing business (138/175). For instance, to build a warehouse in Turkey, it takes 32 different procedures (against 14 in the OECD), requiring 232 days (against 150 in the OECD), and costing 150% of the country’s income per capita (against 72% in the OECD).

The recent Competitiveness and Employment Development Policy Loan contracted with the World Bank by the Turkish Government is intended to improve the investment climate of the country. Indeed, the first component of the reform program supported by this loan focuses on addressing issues with urkey’s investment climate, including: (a) the complexity of administrative barriers to firms’ entry, operation and exit; (b) the size and complexity of the Personal Income Tax and Corporate Income Tax and the effectiveness of the tax administration; (c) competition in the private sector, as related to state aid and State Owned Enterprises, and; (d) the level of FDI in Turkey. For instance, the short-term reform strategy to further facilitate firms’ entry and operation supported under the loan includes measures to facilitate company registration and simplify the licensing regime. The policy actions envisaged include: (a) drafting a Commercial Code broadly compliant with the provisions of the EU _Acquis Communautaire_ on commercial matters and submitting it to the Parliament for approval; (b) reviewing registration and licensing regulations to (i) unifying licensing procedures for the entire country, ensuring consistency among regions; (ii) review and streamline the process for firms; and (c) piloting electronic linkage of Government agencies involved with company registrations in Ankara to improve efficiency of registration. The success of this plan will increase the clustering of firms operating and therefore improve their productivity as suggested by the econometric exercise performed in this paper.

# _Accompanying the urbanization process_

The empirical exercise also emphasizes the importance of positive urbanization spillovers on firms’ productivity. Indeed, the urbanization process brings positive externalities such as network effects and the availability of business support services, but also negative externalities such as congestion effects and its corollaries.

The World Bank has engaged a policy dialogue with the Turkish Government on municipal management in the context of the public sector reform agenda and a sector 22