The Nexus between Business-Investment Climate and Firm Performance in the Middle East and North Africa (Mena) Region

Business and investment climate indicators are relations between the public and private sectors. They may take the form of formal, regular, and informal interactions and their scope can include the economy as a whole or they may target specific types of firms in specific sectors or certain policy processes. Effective business and investment climate is important, because it can lead to a higher rate of investment, profits, and improved productivity, through the creation of an institutional environment, where the state provides high quality public goods, including infrastructure, political stability, and strategies for reducing consumption, fair and effective public administration. This study aims to explore the impact of business-investment climate on firm’s value added, labour and total factor productivity (TFP) in a sample of six countries in the Middle East and North Africa (MENA) region and Turkey. The analysis relies on micro-level data derived from the World Bank Enterprise Surveys over the period 2006-2016. To reduce endogeneity coming from possible reverse causality and the perceptions about business climate we follow an instrumental variables (IV) approach applying the two-stage least squares (2SLS) method. Based on our favoured 2SLS estimates the obstacles in business climate may reduce the firm performance measures by 15-40 per cent. These findings indicate the importance of the quality in business climate and how the improvement in its effectiveness can have a very considerable positive impact on firms’ performance and thus in the overall economic growth of a country