Foreign Investments, Globalization, International business enterprises

Yamagata, Tatsufumi

English

Research Papers in Economics

<アジア経済研究所学術研究リポジトリ ARRIDE> http://ir.ide.go.jp/dspace/
Title
[Book review] "Investment Climate around the World: Voices
of the Firms from the World Business Environment Survey by
Geeta Batra, Daniel Kaufmann, and Andrew H. W. Stone"
Author(s) Yamagata, Tatsufumi
Citation The Developing Economies 42.4 (2004.12): [529]-532
Issue Date 2004-12
URL http://hdl.handle.net/2344/484
RightsThe Developing Economies, XLII-4 (December 2004)
BOOK REVIEWS
Investment Climate around the World: Voices of the Firms from the World Business
Environment Survey by Geeta Batra, Daniel Kaufmann, and Andrew H. W. Stone,
Washington, D.C., World Bank, 2003, xvi + 154 pp.
I
It is well known that among some groups of people the World Bank is disliked very much.
Those likely to have this feeling are people worried about the consequences of globalization
and contraction policies on low-income countries that have suffered economic crises. How-
ever, even these people need to be mindful of the ideas that become the trends at the bank, if
they want to work effectively and be inﬂuential within the ﬁeld of international development.
This is because the bank has an overwhelming presence not only in the lending of money
but also in the publication and distribution of information, and consequently in determining
the context of development strategies. An idea that is becoming the new trend at the bank,
and which is the central theme of the book under review, is that of “investment climate.”
Investment climate will be the central concept taken up in the World Development Report
2005. Behind this new trend are scholars who worry about the current neglect among inter-
national development economists and organizations of the contribution made by the pro-
duction side of an economy to the long-run reduction of poverty. The creation of employ-
ment opportunities through the expansion of production, they say, has to be a key factor
enabling the poor to extract themselves from destitution. At present, however, within the
context of poverty reduction, the main emphasis has been on strengthening the supply side
of the labor market through human capital accumulation, and the contribution to develop-
ment of the demand side of the labor market has not been sufﬁciently taken into account.
The concept of “investment climate” brings out more clearly the sort of business environ-
ment existing in an economy and how conducive it is to the entry of enterprises, their busi-
ness operations and employment of workers. If an environment is not favorable, enterprises
will not start up business with the result that there will be less employment for the poor. This
was the argument that motivated the World Bank survey which ultimately led to the publica-
tion of the present book.
There are three aspects to the investment climate: the macroeconomy, institutions, and
infrastructure. Typical macroeconomic factors affecting investment are inﬂation and ﬂuc-
tuation in exchange rate. Institutional factors are such things as corruption, anti-competitive
practices, policy instability, crime, taxes, and regulations. The importance of infrastructure
for investment needs no explanation.
The World Bank collected data on the investment climate in 80 countries and one terri-
tory in the late 1990s. It collected questionnaires from 10,032 enterprises in both developed
and developing countries/regions. The book provides (1) the methodology used to collect530 THE DEVELOPING ECONOMIES
the data, (2) the fundamental ﬁndings derived from the data, and (3) a simple analysis of
investment climate on the performance of enterprises; this last was designed to provide
basic information on the data set. The data should prove to be seminal because it has been
made so readily accessible and because of the importance of investment climate for the
long-run reduction of poverty. A CD-ROM containing the complete data set comes with the
book making the data available to anyone. Researchers at the World Bank have already
started using the data set and examining it.1
II
The book is organized as follows. Chapter 1, “Background, Approach, and Sampling,” de-
scribes the intent and framework of data collection. The survey was titled the World Busi-
ness Environment Survey (WBES) and was conducted by the World Bank in cooperation
with the European Bank for Reconstruction and Development (EBRD), the International
Development Bank, and Harvard University. A common questionnaire was used in all the
80 countries and one territory sampled so that all the data collected could be pooled and
handled altogether. Of the 80 sampled countries, nine were developed; all the rest were
developing countries. The median number of enterprises sampled per country was around
100, the maximum being 525 for Russia and the minimum 50 for Bangladesh and Belize.
Interviews of enterprises engaged in manufacturing or services were undertaken for the
most part by consulting ﬁrms hired for that purpose. In most cases sectoral composition,
size, ownership (foreign or local), exporting, and location were taken into account for strati-
ﬁed random sampling. This seemed to avoid at least extreme disparities between sample
and population in the composition of ﬁrms. There were basic questions that elicited subjec-
tive views while other questions focused on quantitative estimates of the costs of doing
business, i.e., the amount paid for bribes, the number of business days lost because of power
interruptions and strikes.
The above is followed by a description of the enterprises sampled in the chapter. Eighty
percent of them were small and medium-sized enterprises with an almost equal proportion
of small enterprises (50 or fewer employees) to medium-sized enterprises (51–500 employ-
ees). Roughly a third of the sampled ﬁrms were involved in exporting. Firm ownership was
mainly domestic and private, although there were regional variations. An average of 18
percent of the sampled ﬁrms had holdings or operations in other countries (see Tables 1.4–
1.6 of the book).
Chapters 2 and 3 describe the general characteristics of investment climate by region and
ﬁrm size. The former deals with business environment constraints while the latter delves
into the quality of public services.
One of the most interesting ﬁndings of the two chapters is that the major constraints that
ﬁrms perceive on their business differ by region. Firms in relatively high-income regions,
i.e., OECD countries, central and eastern Europe, the CIS, and Latin American and Carib-
bean countries, are likely to feel that taxes and regulations are the most serious constraints
on business, whereas those in low-income regions, i.e., South Asia, sub-Saharan Africa, and
1 See, among others, David Dollar, Mary Hallward-Driemeier, and Taye Mengistae, “Investment
Climate and International Integration, Firm Performance in Developing Economies,” mimeographed
(Washington, D.C.: World Bank, 2003).531 BOOK REVIEWS
developing East Asian countries (excluding middle-income economies), are likely to cite
corruption as a major constraint (see Table 2.1 of the book).2 Chapter 2 examines the major
types of constraints, such as “tax and regulation,” “ﬁnancing,” “policy instability and uncer-
tainty,” and “corruption.” The spectrum of constraints facing ﬁrms differs depending on the
institutional and governmental environment and business practices. But of all the constraints
discussed, corruption and its impact on ﬁrms receives the most extensive examination, not
only as it is perceived by the ﬁrms themselves but also through an assemblage of quantita-
tive data that was collected. For example, ﬁrms were asked the relative scale of their
”unofﬁcial payments” to sales and the time delays they experienced at customs when im-
porting items. The authors also draw attention to the inﬂuence that a ﬁrm can have on the
content of national laws. This is a reversal of the usual form of corruption in the sense that
the contents of a law may be altered to satisfy the demands of a ﬁrm. The authors call this
type of corruption “state capture.” According to Table 2.14 of the book, about half of the
sampled ﬁrms in developing East Asian countries and in South Asia think that they have a
great inﬂuence on laws at the national level.
Chapter 3 brieﬂy reviews the quality of public services. Firms were asked which areas of
public services they consider “bad.” The worst area is public health followed by the parlia-
ment/national assembly, public works, the courts, the police, the central government, and
customs. By contrast, the best category of public services is the postal service followed by
the telephone service, power utilities, the central bank, water supply, and military. Again
there are variations by region in the evaluation of public services.
Chapter 4 discusses various factors affecting investment climate that relate to the perfor-
mance of ﬁrms. Two indicators are used to measure the performance of ﬁrms: (1) sales
growth in the previous three years, and (2) investment growth in the previous three years.
After controlling for ﬁrm characteristics, the results show that the rate of sales growth is
likely to be low for ﬁrms which feel that ﬁnancing is difﬁcult, taxes are high, corruption is
rampant, and the consulting of businesses regarding government policies is infrequent. Similar
constraints along with the unpredictability of government policies (as opposed to infre-
quent consulting) are shown to be harmful to investment growth. The chapter goes on to
explore the underreporting of revenues by sample ﬁrms. It also stresses the ﬁnding that ﬁrm
size affects businesses in complex ways in that some indicators show that medium-sized
ﬁrms suffer more severely than small or large ﬁrms probably because small ﬁrms may
sometimes receive preferential treatment from the government while large ﬁrms may have
the advantages of scale economies in one form or another.
Chapter 5 sets forth the book’s conclusions and their implications. It summarizes the
study ﬁndings and stresses that this line of research needs to be pursued further and that
more quantitative data needs to be collected. The questionnaire used for the survey and the
basic ﬁgures of the raw data are provided in the appendices.
III
The foremost contribution of this new book is its detailed data set on the investment climate
of 81 economies. This data set is surely seminal. As already mentioned, several research
2 Financing is also seen as a major constraint by ﬁrms in all regions.532 THE DEVELOPING ECONOMIES
papers on international development which have used this data are about to be published.
They will cite this book as the basis for their analyses on investment climate in developing
countries. Scholars and policymakers who are concerned about corruption and interested in
institutional and physical infrastructure will be keen to use the data set and consult this
book for fundamental information on the set. There is no similar ﬁrm-level data set avail-
able enabling the comparison of investment climate in a large number of countries.3 Clearly
this is a great achievement on the part of the World Bank which will be useful worldwide.
This data will be important in the context of poverty alleviation. Poverty reduction has
been approached largely from the standpoint of the household which has focused attention
on the labor supply side of the poor. There has been only a limited amount of research that
has examined poverty reduction from the labor demand side. However, if ﬁrms are not
competitive and do not expand employment opportunities for the poor, there can be no
reduction of poverty. Controlling corruption and providing institutional and physical infra-
structure are key factors underpinning the competitiveness of ﬁrms enabling them to pen-
etrate international markets.
A weakness in the data set is that the majority of questions in the questionnaire ask
interviewees to give subjective evaluations. This makes it difﬁcult to gauge the reliability of
their information and to compare their answers with interviewees living in other regions of
the world. Moreover, subjective variables may cause a measurement bias which is noted in
Box 4.1 of the book (pp. 79–80). The authors call this bias the “kvetch factor” which comes
from Yiddish, and they present some measures to compensate for it. However, there does
not seem to be any clear-cut remedy for eliminating the measurement errors. For example,
according to the data, ﬁrms in South Asia and sub-Sahara Africa are less likely to consider
postal and telephone services as “bad” compared with public health services. Can we say
from this that postal and telephone services are better in quality on average than public
health services? Is “bad” for the health service of a country comparable to “bad” for its
postal service? What if the standard for services in the mind of the interviewees differs?
How bad or good a service is has to be measured in comparison with a standard. If the
standard is not kept identical, the judgments and the answers of interviewees cannot be
readily compared.
However, the authors recognize this obvious weakness, and it will be easily understood
by readers. The advantages of the data set very much surpass its weakness. Users will be
mindful of the weakness as they are with other subjective data sets like the Corruption
Perception Index (CPI)4 which was set up by Transparency International and is widely used
to gauge the level of corruption in a country. (Tatsufumi Yamagata)
3 The Japan External Trade Organization (JETRO) annually conducts its survey of investment-
related costs in 26 cities in Asia for the beneﬁt of prospective investors. This survey contains more
practical data for investors than does the WBES. The JETRO survey can be found on the following
website (http://www.jetro.go.jp/ec/e/stat/ surveys/cost_asia2002.pdf). However, the sampling method
for the JETRO survey is rather ad hoc and not compatible with econometric methodology.
4 The CPI is available on the website of Transparency International (http://www.transparency.org/).

[Book review] "Investment Climate around the World: Voices of the Firms from the World Business Environment Survey by Geeta Batra, Daniel Kaufmann, and Andrew H. W. Stone"

http://ir.ide.go.jp/dspace/bitstream/2344/484/1/ARRIDE_DE_Vol42%284%29_2004.04.05.review_yamagata.pdf

[Book review] "Investment Climate around the World: Voices of the Firms from the World Business Environment Survey by Geeta Batra, Daniel Kaufmann, and Andrew H. W. Stone"

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