Investment Climate and International Integration

Drawing on recently completed firm-level surveys in Bangladesh, Brazil, China, Honduras, India, Nicaragua, Pakistan, and Peru, Dollar, Hallward-Driemeier, and Mengistae investigate the relationship between investment climate and international integration. These standardized surveys of large, random samples of firms in common sectors reveal how firms experience bottlenecks and delays in hard infrastructure such as power and telecommunications, as well as in soft infrastructure such as customs administration. The authors focus primarily on measures of the time or monetary cost of different bottlenecks (such as days to clear goods through customs, days to get a telephone line, and sales lost to power outages). For many of these costs, the obstacles are lower in China than in the South Asian or Latin American countries. There is also systematic variation across cities within countries. The authors estimate a probit function for the probability that a randomly chosen firm is foreign-invested and a separate probit for the probability that a randomly chosen firm is an exporter. These measures of international integration are higher where investment climate is favorable. For locations to take advantage of opportunities in the international market, they need good infrastructure and a sound regulatory environment. The interaction of openness and sound investment climate creates a good environment for investment and production. This paper helps explain why China has been so successful over the past decade, both in terms of integration and of rapid growth, while other countries have had varied success. This paper--a joint product of the Office of the Senior Vice President and Chief Economist, Development Economics, and Investment Climate, Development Research Group--is part of a larger effort in the Bank to understand better the role of business environment in economic performance.