Business Environment Reform changes firms’ behaviour

This page outlines evidence on the effects of legal and regulatory business environment reform as well as infrastructure on firm investment and behaviour.

Some research demonstrates a positive relationship between legal and regulatory reform and private investment.

  • Okey (2011) shows that positive changes in the business environment in line with the World Bank Doing Business (DB) indicators tend to be statistically significantly correlated with small increases in private investment, FDI, and domestic credit to the private sector. The implementation of reforms in at least one DB reform area is correlated with a 0.79-1.02% increase in private investment in Anglophone African countries. Similarly, the Economic Freedom Index is significant in explaining private investment for Anglophone countries.
  • A cross-country study by Eifert (2009) finds that, in the year immediately following one or more ‘Doing Business’ regulatory reforms, investment rates of firms in relatively poor countries accelerate by about 0.6 percentage points. Eifert hypothesises that this correlation may be explained by increased competition when reforms encourage more firms to enter the market, or by increased willingness to invest when regulatory frameworks such as contract enforcement improve.

There is specific evidence that improving the enforcement of contracts may have a particular role in increasing private investment, although only one study shows a causal link. 

  •  A systematic review by Aboal, Noya and Riu (2012) of the effect of changes to contract enforcement on private investment finds a considerable body of evidence demonstrating correlation between the two. The only study finding a causal link is Chemin (2006), which shows that the Code of Civil Procedure Amendment Act in India in 2002, which aimed to increase the speed of disposal of lawsuits, made small firms more likely to invest in a variety of fixed productive assets.

Reliable infrastructure is also proven to be critical for increased production and exports:

  • Freund and Rocha (2011) compare the relative importance of three types of export costs – documentation, transit time, and port handling/customs clearance – and find that inland transit times have by far the largest effect on exports, probably because they create significant uncertainty. A one-day reduction in inland travel times is associated with a 7% increase in exports.

Firm investment may also be facilitated by targeted goverment incentives, such as financial support to innovative technologies.

  • Crespi and Zuniga (2011)  use micro data from innovation surveys to examine the determinants of technological innovation and its impact on firm labour productivity in six Latin American countries (Argentina, Chile, Colombia, Costa Rica, Panama, and Uruguay). In 3 countries, companies that receive public financing invest significantly more (79-81%) in innovation.