Business Environment Reform leads to increased turnover or profits

This page outlines the evidence showing the effects that reforms to the business environment have on the turnover and/or profits of firms. First, an overview is given; summaries of individual publications can be found below that.

Enthusiasm for reforming the business environment is based on the assumption that it will lead, at least in part, to increased turnover and/or profits for firms. USAID (2008) indeed finds that reforms to regulation are particularly effective in boosting the growth in income of industries dominated by small firms.

The business environment also includes tariff structures. Moïsé et al. (2013) study the impact of trade impediments on agricultural trade in 64 developing countries and find that a reduction of tariffs has the potential to increase trade. Studies on the effects of the SUS Government’s Africa Growth and Opportunity Act (AGOA) of 2000, which allowed tariff-free access for many African businesses to US markets, remain inconclusive. However, a review by Condon and Stern (2011) of existing research finds that apparel exports from Sub-Saharan Africa to the United States have increased dramatically since tariffs were waived under AGOA in 2000.

Some would include infrastructure in business environment reform (although the DCED Practical Guidance on Supporting Business Environment Reforms includes it rather as part of the broader Investment Climate). The study by Moïsé. et al. finds that waiving tariffs is more effective when combined with complementary policies to reduce supply-side constraints, in particular infrastructure. Agricultural exports are found to be most responsive to the quality of transport- and trade-related infrastructure.


Summaries of individual publications

USAID (2008) “Industry Growth, Firm Size and the Business Environment”
This study uses observational, cross-country evidence  to examine the relationship between business environment reform regulations, measured in terms of the World Bank Doing Business Indicators, and the growth of industries dominated by small firms. The authors use a sample of 100 countries and 27 industries in the manufacturing sector. Small firms are defined as businesses with fewer than 20 employees. They find that industries composed of small firms grow faster than industries dominated by large firms, in economies with better ‘doing business’ environments. This suggests that a good business environment boosts the growth of industries dominated by small firms more than industries dominated by large firms. In particular, the authors find that industries dominated by small firms benefit from less stringent and more business friendly regulations associated with starting and closing a business, licensing requirements, exporting and importing, employment hiring and firing decisions, paying taxes, protecting investors and obtaining credit.

Evdokia Moïsé et al. (2013) “Estimating the Constraints to Agricultural Trade of Developing Countries”.
The paper uses observational data in a cross-sectional gravity model to analyse the impact of potential supply-side constraints upon developing countries’ exports of agricultural products. This is supplemented by three case studies of Aid for Trade programmes supporting agricultural trade expansion in Indonesia, Zambia and Mozambique. The paper finds a 10% improvement in the quality of transport and trade-related infrastructure has the potential to increase agricultural exports from developing countries by 30%, while a reduction of tariffs by 10% would increase trade value by about 3.7%. The analysis also highlights the importance of complementary policies such as education and political stability, the impact of constraints related to standards and conformity assessment or access to credit, and the contribution of donor-supported programmes.

Niall Condon and Matthew Stern (2011) “The effectiveness of the African Growth and Opportunity Act in increasing trade from Least Developed Countries: A systematic review”, London: EPPI-Centre, University of London This systematic review assesses existing research on the effectiveness of the African Growth and Opportunity Act (AGOA) on trade from Least Developed Countries. Exports from Sub-Saharan Africa to the US have increased substantially since 2000, with an increasing share of these exports utilising AGOA preferences. For apparel exports specifically, there is conclusive evidence that their increase can be directly attributed to the AGOA.