1. Steven Fries Deputy Chief Economist
The Business Environment, Employment and Enterprise Performance: Evidence from Transition Economies
Steven Fries
Deputy Chief Economist

2. Introduction
What are the drivers of Investment, employment and growth of firms in transition economies?
Business environment and governance are key
Unique insights gained from the EBRD – World Bank Business Environment and Enterprise Performance Survey
Business environment obstacles impose significant costs and constraints on firms
Business environment and “state capture” also affect investment, jobs and firm growth 3

3. What is the Business Environment?
Business taxation and regulation
Provision of essential business services
Access to infrastructure services and finance
Provision of essential public goods
Law and order
Contract enforcement and protection of property rights
Corruption in public administration and judiciary
Exercise of undue influence by firms over state
Creates uneven playing field for firms

4. How good is the business environment?
Assessments from EBRD – WB Business Environment and Enterprise Performance Survey
Based on first-hand assessments of local firms
Implemented in 1999, 2002 and 2005
Questions on key aspects of the business environment, ties between firms and government and enterprise performance
Shows how the business environment varies across dimensions and countries and over time and how it affects enterprise performance

5. Survey Sample, 2002 About 6,100 firms surveyed, up from 4,100 in 1999
Firm shares in industry services reflect GDP shares
Within industry and services, representative of firm population
Sector
Industry
Services % 39 61
Ownership
New private
Privatised
State owned 68 18 14
Size (number of employees)
Small (2 to 49)
Medium (50 to 249)
Large (250 to 9999) 19
Location
Capital
Large cities (not capital)
Small cities
Rural areas 32 25 23 3

6. How reliable are the business environment measures?
Consistency checks performed on measures
Comparison of qualitative measures with objective statistical measures (macroeconomic instability)
Too pessimistic in the Kyrgyz Republic in 1999 and too optimistic in Azerbaijan in 2002
No evidence of excessive optimism or pessimism in business environment dimensions related to business cycle
Significant consistency within BEEPS between qualitative and quantitative measures 3

7. How good is business environment in Eastern Europe and Central Asia?
Improving but could be better
Total 3

8. Largest business environment improvements in 2002 seen in the CIS …
… and in some South-east European countries
Change from 1999 to 2002 3

9. 2002 Business environment perceptions
Most South-east European countries below the median
Business environment measures in 2002 3

10. Time tax if no bribes paid to public officials (per cent)
Obstacles in the business environment impose significant costs on firms
Time tax – evidence of the state’s “grabbing hand”
Time tax if no bribes paid to public officials (per cent)
Time tax if bribes paid to officials (per cent) 3

11. Obstacles in the business environment impose significant costs on firms
Overall “bribe tax” is high in some countries
Average bribe tax 3

12. Obstacles in the business environment impose significant costs on firms
High crime losses in some countries
Per cent of total sales 3

13. Obstacles in the business environment impose significant constraints on firms
Working days lost due to infrastructure failures
Days 3

14. Proportion of new investment financed from retained earnings
Obstacles in the business environment impose significant constraints on firms
Banking inefficiencies limit access to finance
Proportion of new investment financed from retained earnings 3

15. Capital, employment and firm growth
Capital investment is the major driver of growth
Contribution of factors to real revenue growth
Factors of production 3

16. Business environment and growth
Variable Real growth Employment Real revenue
fixed assets growth growth
-0.15* * *
(-3.06) (-2.85) (-6.95)
Capacity utilisation rate in 1999
Acceleration of real GDP growth in 2001 v average
0.88* *
(2.01) (1.52) (2.82)
Country business environment in 1999
-10.03* * 1.93
(-2.58) (4.96) (0.43)
Captor firm (laws and regulation)
10.58* *
(2.49) (0.91) (2.59)
External cost of capture (laws and regulations)
(0.90) (-0.07) (-1.19)

17. Firm ownership, size and growth
Variable Real growth Employment Real revenue
fixed assets growth growth
-8.86* *
(-2.39) (0.58) (-2.83)
State ownership
New private ownership
18.26* *
(6.30) (0.93) (6.23)
Foreign ownership
7.94* * 5.98
(2.50) (5.33) (1.64)
Log of employment
12.03* * *
(5.24) (-12.99) (5.45)
Log of employment squared
-0.88* 4.22* *
(-2.39) (8.78) (-2.81)

18. Competition and growth
Variable Real growth Employment Real revenue
fixed assets growth growth
(0.11) (1.02) (-0.27
Price elasticity of demand - low
Price elasticity of demand - moderate *
(-1.84) (-1.19) (-2.65)
Price elasticity of demand - high *
(-1.77) (-1.21) (-4.28)
Number of observations
4,444 4,654 4,549
Adjusted R - squared
[controls for sector and location within countries omitted]

19. State capture also affects productivity and growth
State capture supports investment and growth of “captor firms”, but …
Growth in fixed capital
Real revenue growth
Productivity growth
Per cent increase, 3

20. State capture also affects productivity and growth
… holds back the productivity of firms affected by capture
Growth in fixed capital
Real revenue growth
Productivity growth
Per cent increase, 3

21. Conclusion Reforms in transition economies are paying dividends
A better business environment supports investment and growth of firms, but …
… firms substitute capital for labour to become more competitive
But significant obstacles remain to be addressed
Business environment and state capture
Wide variation across dimensions and countries
Sustaining the reform drive should lead to even stronger firm performance
More investment, higher productivity and potentially jobs
BEEPS implemented again in 2005 to monitor progress 3