existence of corruption within the judiciary, and the ability of individuals and businesses to enforce contracts. _Political stability_ (World Governance Indicators), which ranges from -2.5 to 2.5 = best, and _corruption_ (Heritage data based on Transparency International’s Corruption Perceptions Index) take governance into account, while the _doing business_ frontier gap (WDI, from 2004 on) and _domestic competition_ and _foreign competition_ estimates (WEF, from 2006 on) refer to the business climate. The former is based on the regulatory environment for the starting and operation of a local firm and takes values from 0 to 100 = best. The latter are composite indices concerned with market concentration, antimonopolistic policies, investment incentives, and tax policy (domestic) as well as tariffs, nontariff measures, and investment promotion (foreign).<sup>7</sup> _Financial and labor market policy_ is captured on the financial side by the value of credit given to the private sector as percentage of GDP ( _private credit_ ) from the WDI. This quantitative variable is complemented by an estimate of _financial freedom_ (Heritage), which measures banking efficiency as well as independence from government control and interference in the financial sector. It relies on various underlying data sources, including from the International Monetary Fund, OECD, and official government publications of each country, among others. _Labor market policy_ is examined using Heritage’s _labor freedom_ index that captures labor market institutions. It includes various aspects of the legal and regulatory framework of a country’s labor market, such as minimum wages; laws inhibiting layoffs; severance requirements; and measurable regulatory burdens on hiring, hours, and so forth. The measure is mainly based on data from the World Bank’s Doing Business study. We also use an index of unit labor costs (ULC) by the OECD that proxies for a country’s cost competitiveness (base year = 2005). It measures the average cost of labor per unit of output and is calculated as the ratio of total labor costs to real output.

_Education and skills_ are represented on the education side by the expected years of _schooling_ (Barro and Lee 2013), which gives a quantitative measure of the education system. As qualitative measure, we use an index of _educational quality_ provided by the WEF on the basis of their Executive Opinion Survey. Regarding skills, we look at the share of workers with a secondary degree, or higher, in the total workforce (WDI) and the WEF’s index for on-the-job _training_ , which is equally a qualitative survey-based indicator.

_Innovation and product standards_ are represented on the quality side by the stock of ISO certifications related to quality management (ISO 9001, 13485, 16949, and 22000) per capita. Innovation is measured by _R&D_ intensity (WDI), and the WEF’s survey-based _Innovation_ and _Technology adoption_ indices—the former looks at private and public innovation capacities and spending while the latter measures countryand firm-level availability of new technologies.

_Labor standards_ cover basic rights including the WDI’s share of children between 7 to 14 years old in employment, _child labor_ , share of _vulnerable employment_ , and the share of female workers in the total workforce, _female intensity_ . In addition, we cover the number of ILO’s _basic conventions_ (that is, fundamental and governance conventions) signed, complemented with different measures of wage inequality. We use the ILO’s _wage dispersion_ between the 9th and 5th wage decile, and the OECD’s _minimum wage_ relative to the median wage.

_Social standards_ deal with a country’s basic welfare system. We use ILO data on the share of _health_ expenditure in total government spending, the share of workers contributing to a _pension_ scheme, and the share of unemployed receiving regular _unemployment_ benefits. Additionally, we assess the role of _total conventions_ of the ILO signed.

> 7  WEF’s foreign competition measure could equally be grouped under trade and investment policy.

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