Freund, Hallward-Driemeier and Rijkers (2014) investigate whether corruption accelerates policy implementation.
The authors start by documenting striking differences between the time it takes to complete regulatory proce-dures in practice and the time it takes when complying with the law. These are shown in figure 13.2, which plots the 10th percentile, median and 90th percentile de facto log times to get a construction permit in a given country and year as reported by entrepreneurs in the World Bank Enterprise Surveys against the time it should take to
complete all the formalities to build a warehouse according to the Doing Business indicators. The authors link this heterogeneity to the incidence of demands for bribes.
The authors examine the relationship between requests for bribes and the time it takes to complete various regulatory requirements—getting a construction permit, obtaining an operating license, obtaining an electric-ity connection and clearing customs.
They test 3 predictions implied by the
“grease the wheels” hypothesis, which contends that bribes act as speed money: that all else being equal, firms confronted with requests for bribes should get things done faster; that firms with a higher opportunity cost of waiting are willing to pay more and consequently face shorter wait times;
and that bribing is more beneficial where regulation is onerous.
The data are inconsistent with all 3 predictions. In the authors’ preferred specifications, all else being equal, firms confronted with demands for bribes wait about 1.5 times as long to get a construction permit, operating license
FIGURE 13.2 A striking difference between the time it takes for construction permitting in practice and the time it takes when complying with the law
0 2 4 6
Log of time to get a construction permit as measured by Enterprise Surveys
4.0 4.5 5.0 5.5 6.0 6.5
Log of time to deal with construction permits as measured by Doing Business 10th percentile 50th percentile 90th percentile Colombia, 2010
Vanuatu, 2009
Tonga, 2009
Note: The sample comprises 106 countries. Data are for the most recent year available.
Source: Freund, Hallward-Driemeier and Rijkers 2014.
or electricity connection as firms that did not have to pay bribes—and they wait 1.2 times as long to clear customs when exporting and 1.4 times as long when importing. The results are robust to controlling for firm fixed effects and at odds with the notion that corruption enhances efficiency.
CONCLUSION
The research papers reviewed in this chapter show that business-friendly regulation is integral to economic growth and development.3 Where regulation is streamlined and judicious, it unleashes innovation, promotes the creation of jobs and helps attract for-eign direct investment.
But while these papers answer many questions, they also pose many new ones. For example, Hoffman, Munemo and Watson (2014) suggest that an important area for future research is to find out what the right amount of regulation is for business entry. And the pioneering study by Audretsch, Belitski and Desai (2014) invites follow-up research on the impact of multiple dimensions of the national business environment on firms in different cit-ies. The expansion of the global Doing Business sample to the second largest business city in 11 large economies, along with the data published by the subnational Doing Business reports, will enable further research to explore the effects of business regulations across different cities within a country—and to better understand the reasons for differences in outcomes.
NOTES
1. Based on searches for citations of the 8 background papers that form the basis for the Doing Business indicators in the Social Science Citation Index and Google Scholar (http://scholar.google.com).
2. The conference took place at Georgetown University’s McDonough School of Business in Washington, DC. It was cosponsored by the U.S. Agency for International Development and the Kauffman Foundation. More information is available at http://
www.doingbusiness.org/special-features /conference.
3. For a comprehensive review of the literature on the effects of business regulation, see Doing Business 2014.
TABLE 13A.1 Summary of the main findings and methodology of selected papers from the Doing Business research conference
Theme Main findings Methodology overview Data sources
Entrepreneurship Klapper, Love and Randall (2014)
GDP growth, especially if combined with a higher level of financial development and a better business regulatory environment, is associated with higher new firm registrations.
The initial empirical exercise uses a simple model with entry density as the dependent variable and economic growth (as a proxy for the business cycle) as the main independent variable. The authors then investigate heterogeneity in the relationship between the business cycle and new firm registration.
World Bank, Entrepreneurship Database;
World Bank, World Development Indicators database; Doing Business database
Entrepreneurship Bripi (2013)
Bureaucratic time delays and, to a lesser extent, costs due to inefficient regulatory procedures can reduce the firm entry rate in industries that should have “naturally” high entry rates relative to low-entry sectors.
The analysis focuses on industry and cross-province interaction effects to investigate the impact of regulation on firm entry.
Bank of Italy data set measuring the time and costs of regulation across Italian regions
Entrepreneurship
Audretsch, Belitski and Desai (2014)
Specific national regulatory dimensions (such as contract enforcement) as well as different types of reform within a dimension (such as those affecting cost) are associated with the rate of new business start-ups and self-employment in European cities.
Panel data random effects regression is used to examine how the business environment affects new business creation and self-employment in a panel of European cities.
Eurostat Urban Audit database, regional and city statistics; Doing Business database
Investment
Jovanovic and Jovanovic (2014)
Greater regulatory efficiency as measured by Doing Business indicators has a positive association with foreign direct investment flows from OECD countries to Eastern European and Central Asian countries.
The analysis uses the generalized method of moments technique on data on bilateral foreign direct investment flows from 22 OECD countries to 28 Eastern European and Central Asian countries during 2004–11.
World Bank, World Development Indicators database; Organisation for Economic Co-operation and Development data; International Monetary Fund (IMF), World Economic Outlook and International Financial Statistics databases; International Labour Organization data; Doing Business database
Investment
Hoffman, Munemo and Watson (2014) Having some business entry regulation helps define the playing field for firms and reduces the cost of information search for those entering new markets. But too much regulation increases the cost of doing business, dissuading firms from entering markets at all.
The analysis tests several hypotheses using a model with franchise expansion (the number of units planned for a country in the future divided by its urban population) as the dependent variable and several independent variables, including the Doing Business distance to frontier measure, entry regulation (measured by the cost of business start-up procedures as a percentage of GNI per capita) and the national corporate tax rate (measured as a percentage of profits). Additional explanatory variables include economic development (measured by real GDP per capita), measures of media infrastructure and of governance, and a dummy variable estimating the impact of the 2008–09 financial crisis on franchise expansion.
Press announcements by U.S. franchise companies on expansion plans or moves made into specific international markets during 2005–11 (to develop the sample);
Doing Business database; World Bank, World Development Indicators database;
Worldwide Governance Indicators
Innovation
Yang (2014)
The profits of innovative firms are lower in business climates where regulatory or governance-related factors (such as corruption or the time and cost to start a business) are poor.
The analysis exploits the panel structure of the data.
A first-difference regression is estimated. A number of control variables are used, and further robustness checks are applied.
World Bank Enterprise Surveys; Doing Business database; World Bank data catalog
Debt enforcement Rathinam (2014)
In India the introduction of debt recovery tribunals—a procedural law innovation that bypasses the overburdened civil courts in adjudicating financial disputes involving banks—explains increased bank lending.
The analysis uses a differences-in-differences model and data on lending by commercial banks in India (including advances to the commercial sector and total secured loans extended) for the years before and after the introduction of debt recovery tribunals (1993 and 1995).
Centre for Monitoring Indian Economy, PROWESS database; Reserve Bank of India, annual accounts data on scheduled commercial banks
TABLE 13A.1 Summary of the main findings and methodology of selected papers from the Doing Business research conference
Theme Main findings Methodology overview Data sources
Unemployment
Freund and Rijkers (forthcoming) Episodes of drastic reductions in the unemployment rate are much more prevalent in countries with higher levels of unemployment and, given unemployment, are more likely in those with better regulation.
The authors use an event-studies approach to examine how countries achieved episodes of drastic reductions in the unemployment rate over the period 1980–2008.
They examine the determinants of such episodes by estimating a probit model, with the potential for an unemployment reduction episode as the dependent variable. After performing several robustness checks, they use Bayesian model averaging to investigate which aspects of regulation matter most.
World Bank, World Development Indicators database; IMF data;
Worldwide Governance Indicators;
Heritage Foundation’s Index of Economic Freedom; Doing Business database
Corruption and transparency
Freund, Hallward-Driemeier and Rijkers (2014) Firms confronted with demands for bribes wait about 1.5 times as long to get a construction permit, operating license or electricity connection as firms that did not have to pay bribes—and they wait 1.2 times as long to clear customs when exporting and 1.4 times as long when importing.
The analysis tests 3 related hypotheses (whether bribe requests and the time to complete regulatory processes are positively correlated; and whether
“greasing the wheels” is more evident for firms with the highest opportunity cost of waiting or in countries where regulations are most burdensome) by modeling the log of policy implementation time (the time it takes to export, import, get a construction permit or obtain an operating license) as a function of firm characteristics. A dummy variable indicating whether a bribe was solicited or expected is added. Results are robust to controlling for firm fixed effects and comparing within-firm heterogeneity in wait times for different government services.
World Bank Enterprise Surveys; Doing Business database
Going Beyond Efficiency
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