would lead to a bias in favor of our results (lower employment growth after the entry of politically connected firms into new, previously unconnected sectors). We present several pieces of evidence, however, that indicate that this scenario is unlikely including comparisons of the same sectors in other countries, showing no evidence that growth rates were lower in sectors where we observe politically connected entry in Egypt.

Many of our results below are based on differences between sectors with and without politically connected firms. This gives rise to the concern that the results hinge on a small number of sectors that happen to have politically connected firms. In fact, of the 320 sectors in our database about half (49%) include connected firms (186 out of 372); 49 have at least one (33 sectors) and as many as 10 (one sector) firms with politically connected CEOs; 142 have at least one (57 sectors) and as many as 35 (one sector) firms with politically connected owners; and 165 have at least one (57) and as many as 35 (four sectors) firms with any form of political connection. Within manufacturing, where 41 percent of the connected firms operate, they are present in 58 percent of the 4-digit industries (73 out of 126).

Moreover, Tables A1 and A4 in the Appendix reveal substantial variation in the activities of connected firms. They operate in some more mature traditional 4-digit sectors, but not others. They also entered some modern sectors (e.g., manufacturing of batteries or computer programming services). These attributes of the distribution of connected firms across economic activities in Egypt facilitate the empirical identification of the impact of political connections on aggregate growth.

# **6. Firm performance, connected versus unconnected firms**

If politically connected firms have policy advantages over unconnected firms, they should be able to accumulate larger market shares and scale than would otherwise be the case. Employment and revenues should therefore be greater. The Orbis data has employment data for around 20,000 establishments. On average, the 436 connected firms in this dataset (33 connected firms have no employment data) have 941 employees compared to 253 employees among the remaining establishments. Orbis consolidated revenue data, available for 678 firms, reveals that 67 connected firms with data had revenues of $172 million, on average, four times higher than the 611 unconnected firms between 2003 and 2010.

In addition, protected from entry, the profits and profitability (profits/assets) of connected firms should be larger. Consolidated profits data, however, are available only for 288 firms. Of these, the 49 connected firms had average net profits that were _13 times_ higher than the profits of the remaining firms.

Table 2 presents the results of a more rigorous comparison of the size and profitability of connected and unconnected firms.<sup>12</sup> The first column of Table 2 reports the unconditional performance differences of connected relative to unconnected firms. Along each of these dimensions, the differences between politically connected and unconnected firms are large in magnitude and statistically significant. Employment, revenue and profitability differentials persist when we restrict

> 12 The relatively few firms that have data on revenues and profits in the Orbis database preclude the use of narrow definitions of political connectedness in the comparisons reported here. We therefore use the largest sample of politically connected firms.

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