Assesing the Impact of the Investment Climate on Productivity Using Firm-Level Data: Methodology and the Cases of Guatemala, Honduras, and Nicaragua

Developing countries are increasingly concerned about improving country competitiveness and productivity, as they face the increasing pressures of globalization and attempt to improve economic growth and reduce poverty. Among such countries, Investment Climate Assessments (ICA) have become a standard instrument for identifying key obstacles to country competitiveness and imputing their impact on productivity, in order to prioritize policy reforms for enhancing competitiveness. Given the survey objectives and the nature and limitations of the data collected, this report discusses the advantages and disadvantages of using different productivity measures based on data at the firm level. The main objective is to develop a methodology to appropriately estimate, in a robust manner, the productivity impact of the investment climate variables. To illustrate the use of this methodology, the report applies it to the data collected for ICAs in three countries: Guatemala, Honduras and Nicaragua. Observations in logarithms (logs) of the variables, and not in rates of growth, are pooled from all three countries. The econometric analysis is done with variables in logs to reduce the impact of measurement errors and allow inclusion of as many observations as possible since the “panel” data set is very unbalanced. Endogeneity of the production function inputs and of the investment climate variables is addressed by using a variant of the control function approach, based on individual firm information, and by aggregating investment climate variables by industry and region. It is shown that it is possible to get robust results for 10 different productivity measures, if one follows a consistent econometric methodology of specification and estimation. For policy analysis, the report strongly recommends using those results of investment climate variables on productivity that are robust for most of the productivity measures. Efficiency aspects of firms in each country are also analyzed. Finally, the results are decomposed to obtain country-specific impacts and establish corresponding priorities for policy reform. The actual estimates for the three countries show the level of significance of the impact of investment climate variables on productivity. Variables in several categories, red tape and infrastructure in particular, appear to account for over 30 percent of productivity. The policy implications are clear: investment climate matters enormously and the relative impact of the various investment climate variables indicates where reform efforts should be directed. Given the robustness of the results, it is argued that the econometric methodology of productivity analysis developed here ought to be used as a benchmark to assess productivity effects for other ICAs or surveys with firm-level data of similar characteristics

Monthly, annual and quarterly frequencies: a comparison of models for tourism in Sardinia and bounded rationality

This paper constructs and estimates the demand for international tourism for the Italian Province of Sassari. The sample period under estimation is from 1972 to 1995. Three dynamic models are estimated at monthly, annual and quarterly data frequencies. Similarities and differences are explored amongst the three models, using recently developed econometric techniques. A "pre-modelling" data analysis is undertaken for the economic series of interest. By adopting the LSE "general-to-specific" methodology, dynamic estimations are run. A full range of diagnostic tests is provided. Short and long run income elasticities, negativity and substitutability are tested on the light of economic theory. On balance, evidence is found that the monthly and quarterly models present homogenous results in terms of seasonal and long run unit roots. Annual data show different and perhaps misleading results.

Assessing the impact of the investment climate on productivity using firm-level data : methodology and the cases of Guatemala, Honduras, and Nicaragua

Developing countries are increasingly concerned about improving country competitiveness and productivity as they face the increasing pressures of globalization and attempt to improve economic growth and reduce poverty. Among such countries, investment climate assessments (ICA) have become a standard instrument for identifying key obstacles to country competitiveness and imputing their impact on productivity, in order to prioritize policy reforms for enhancing competitiveness. Given the survey objectives and the nature and limitations of the data collected, the authors discuss the advantages and disadvantages of using different productivity measures based on data at the firm level. Their main objective is to develop a methodology to appropriately estimate, in a robust manner, the productivity impact of the investment climate variables. To illustrate the use of this methodology, the authors apply it to the data collected for ICAs in three countries-Guatemala, Honduras, and Nicaragua. Observations in logarithms (logs) of the variables, and not in rates of growth, are pooled from all three countries. The econometric analysis is done with variables in logs to reduce the impact of measurement errors and allow inclusion of as many observations as possible since the"panel"data set is very unbalanced. The authors address the endogeneity of the production function inputs and of the investment climate variables by using a variant of the control function approach based on individual firm information, and by aggregating investment climate variables by industry and region. The authors show that it is possible to get robust results for 10 differentproductivity measures, if one follows a consistent econometric methodology of specification and estimation. For policy analysis, they recommend using those results of investment climate variables on productivity that are robust for most of the productivity measures. The also analyze efficiency aspects of firms in each country. Finally, they decompose the results to obtain country-specific impacts and establish corresponding priorities for policy reform. The actual estimates for the three countries show the level of significance of the impact of investment climate variables on productivity. Variables in several categories, red tape and infrastructure in particular, appear to account for over 30 percent of productivity. The policy implications are clear: investment climate matters enormously and the relative impact of the various investment climate variables indicates where reform efforts should be directed. Given the robustness of the results, the authors argue that the econometric methodology of productivity analysis developed here ought to be used as a benchmark to assess productivity effects for other ICAs or surveys with firm-level data of similar characteristics.

The Effect of the Tax Reform Act of 1986 on the Location of Assets in Financial Services Firms

This paper examines the effects of the Tax Reform Act of 1986 on the international location decisions of U.S. financial services firms. The Act included rule changes that made it substantially more difficult for U.S. firms to defer U.S. taxes on overseas financial services income held in low-tax jurisdictions. These same rule changes were not applied to other forms of income; in particular, income generated from active manufacturing operations was still eligible for deferral after the Act. We use information from the tax returns of U.S. corporations to examine how local taxes affect the allocation of assets held abroad. We find that, before the Act, the location of assets in financial subsidiaries was responsive to differences in host country tax rates across jurisdictions. However, after the Act, differences in host country tax rates no longer explain the distribution of assets held in financial services subsidiaries abroad. In contrast, we find that assets held in manufacturing subsidiaries have become more sensitive to variations in tax rates. Our results suggest that the tightening of the anti-deferral provisions applicable to financial services companies has been successful in neutralizing the effect of host country income taxes on investment location decisions.

A Nested Demand Shares Model of Artificial Marine Habitat Choice by Sport Anglers

There is growing public interest in the development of artificial habitats to enhance and diversify coastal marine resources for recreational and commercial uses. In this article, a hierarchical discrete choice model of recreational demand for artificial habitat is presented using a nested multinomial logit analysis of artificial and natural habitat site choice by sport anglers. The model can be used to evaluate the effects of site characteristics and socioeconomic attributes of individual sport anglers on the share allocation of marine fishing trips and to estimate the economic benefits of new artificial habitat. An empirical application using survey data from sport anglers in southeast Florida is reported. The model parameters are used to estimate the expected use benefits and distributional implications of alternative new artificial habitat sites. Extensions and limitations of the model for artificial habitat planning are considered.Environmental Economics and Policy, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy,

National Multi-Modal Travel Forecasts. Literature Review: Aggregate Models

This paper reviews the current state-of-the-art in the production of National Multi-Modal Travel Forecasts. The review concentrates on the UK travel market and the various attempts to produce a set of accurate, coherent and credible forecasts. The paper starts by a brief introduction to the topic area. The second section gives a description of the background to the process and the problems involved in producing forecasts. Much of the material and terminology in the section, which covers modelling methodologies, is from Ortúzar and Willumsen (1994). The paper then goes on to review the forecasting methodology used by the Department of Transport (DoT) to produce the periodic National Road Traffic Forecasts (NRTF), which are the most significant set of travel forecasts in the UK. A brief explanation of the methodology will be given. The next section contains details of how other individuals and organisations have used, commented on or attempted to enhance the DoT methodology and forecasts. It will be noted that the DoT forecasts are only concerned with road traffic forecasts, with other modes (rail, air and sea) only impacting on these forecasts when there is a transfer to or from the road transport sector. So the following sections explore the attempts to produce explicit travel and transportation forecasts for these other modes. The final section gathers together a set of issues which are raised by this review and might be considered by the project

Gasoline and Diesel Demand in Europe: New Insights

This study utilizes a panel data set from 14 European countries over the period 1990-2004 to estimate a dynamic model specification for gasoline and diesel demand. Previous studies estimating gasoline consumption per total passenger cars ignore the recent increase in the number of diesel cars in most European countries leading to biased elasticity estimates. We apply several common dynamic panel estimators to our small sample. Results show that specifications neglecting the share of diesel cars overestimate short-run income, price and car ownership elasticities. It appears that the results of standard pooled estimators are more reliable than common IV/GMM estimators applied to our small data set.Dynamic panel data, Gasoline demand, Error components, Omitted variable

Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply

The purpose of this paper is to present an exercise where we identify optimal income tax rules under the constraint of fixed tax revenue. To this end, we estimate a microeconomic model with 78 parameters that capture heterogeneity in consumption-leisure preferences for singles and couples as well as in job opportunities across individuals based on detailed Norwegian household data for 1994. For any given tax rule, the estimated model can be used to simulate the choices made by single individuals and couples. Those choices are therefore generated by preferences and opportunities that vary across the decision units. Differently from what is common in the literature, we do not rely on a priori theoretical optimal taxation results, but instead we identify optimal tax rules – within a class of 6-parameter piece-wise linear rules - by iteratively running the model until a given social welfare function attains its maximum under the constraint of keeping constant the total net tax revenue. We explore a variety of social welfare functions with differing degree of inequality aversion and also two alternative social welfare principles, namely equality of outcome and equality of opportunity. All the social welfare functions turn out to imply an average tax rate lower than the current 1994 one. Moreover, all the optimal rules imply – with respect to the current rule – lower marginal rates on low and/or average income levels and higher marginal rates on relatively high income levels. These results are partially at odds with the tax reforms that took place in many countries during the last decades. While those reforms embodied the idea of lowering average tax rates, the way to implement it has typically consisted in reducing the top marginal rates. Our results instead suggest to lower average tax rates by reducing marginal rates on low and average income levels and increasing marginal rates on very high income levels.Labour supply, optimal taxation, random utility model, microsimulation.

Female labour supply in Spain: The importance of behavioural assumptions and unobserved heterogeneity specification

We estimate four models of female labour supply using a Spanish sample of married women from 1994, taking into account the complete form of the individual’s budget set. The models differ in the hypotheses relating to the presence of optimisation errors and/or the way non-workers contribute to the likelihood function. According to the results, the effects of wages and non-labour income on the labour supply of Spanish married women depend on the specification used. The model which has both preference and optimisation errors and allows for both voluntarily and involuntarily unemployed females desiring to participate seems to better fit the evidence for Spanish married women.Labour supply, taxes, unobserved heterogeneity

National Multi-Modal Travel Forecasts. Literature Review: Aggregate Models

This paper reviews the current state-of-the-art in the production of National Multi-Modal Travel Forecasts. The review concentrates on the UK travel market and the various attempts to produce a set of accurate, coherent and credible forecasts. The paper starts by a brief introduction to the topic area. The second section gives a description of the background to the process and the problems involved in producing forecasts. Much of the material and terminology in the section, which covers modelling methodologies, is from Ortúzar and Willumsen (1994). The paper then goes on to review the forecasting methodology used by the Department of Transport (DoT) to produce the periodic National Road Traffic Forecasts (NRTF), which are the most significant set of travel forecasts in the UK. A brief explanation of the methodology will be given. The next section contains details of how other individuals and organisations have used, commented on or attempted to enhance the DoT methodology and forecasts. It will be noted that the DoT forecasts are only concerned with road traffic forecasts, with other modes (rail, air and sea) only impacting on these forecasts when there is a transfer to or from the road transport sector. So the following sections explore the attempts to produce explicit travel and transportation forecasts for these other modes. The final section gathers together a set of issues which are raised by this review and might be considered by the project