Abstract
M.Phil. (Industrial Policy)
Abstract:? This study investigates the effects of six dimensions of investment climate, namely infrastructure, corruption, red tape and regulations, political instability, crime and access to finance, on firm productivity and profitability. We applied simultaneous equations and pooled least squares estimation procedures using a large dataset of 2 000 manufacturing firms in Egypt. Our main results indicate that investment climate variables measuring access to finance, adequacy of infrastructure and political instability can significantly affect the performance of manufacturing firms, and this result is robust across different specifications. Access to finance appears to be one of the most important factors, and the expected positive impact on firm total factor productivity and labour productivity is between 0.4% and 2.4% for an increase in working capital finance by one percentage point. Political instability has the expected negative sign and is more likely to be perceived as a significant business constraint by small, locally- oriented firms as opposed to large, foreign-oriented firms. The relationship between corruption and firm performance criteria is not conclusive, however, with weak evidence of a negative effect of corruption on firm productivity. Our results suggest that successful reforms to enhance the investment climate will be disproportionately beneficial but not exclusive to SMEs, especially concerning access to finance, macroeconomic stability and electricity supply.