Increased firm turnover and/or profits create economic growth

This page summaries evidence that shows the links between micro-level increases in firm’s profitability and turnover, and (macro-) economic growth. There are two studies, concerning different types of intervention, which demonstrate such a link.

Three separate studies below provide evidence on the link between improved business regulations and economic growth, based on cross-country correlations.

The non-profit social enterprise KickStart started in 1991 and, as of October 2013, has sold more than 232,000 human-powered irrigation pumps at low cost to farmers in Burkina Faso, Mali, Tanzania, Kenya and other countries. The project is a powerful example of how a direct intervention which seeks to change the behaviour of firms – in this case facilitating access to productivity-enhancing technology – can increase firms’ revenue to an extent which is significant for the total GDP of a country. In 2011, KickStart’s research indicated that the new revenues generated by users of the pumps in Kenya were equivalent to 0.6% of the country’s GDP.

A cross-country study by Isabella Massa (2011) uses data from 64 countries between 1986 and 2009 to estimate the effect of Development Finance Institutions – which aim to help companies implement their investment plans – on macro-economic indicators. Massa finds that DFI investment has a significant and positive correlation with national economic growth. This is stronger in lower-income countries, where a 10% increase in investment is estimated to lead to a 1.3% increase in growth, as opposed to 0.9% growth in higher-income countries.

A research article  by Boudhiaf Messaoud and Zribi El Ghak Tereni (2014) – ‘Business Regulations and Economic Growth: What Can be Explained?’ – in the International Strategic Management Review investigates business regulations-economic growth nexus in 162 countries over the period 2007-2011. It uses ten indicators of Doing Business and a set of control variables. The results provide show a statistically significant correlation between regulation indices and economic growth except for Trading Across Borders and Dealing with Construction Permits indices. This finding is consistent with earlier research by Djankov et al. (2006) and Hanusch (2011).