Who survives ? the impact of corruption, competition and property rights across firms

Size, age, sector, and productivity are commonly cited as factors determining a firm’s survival. However, there are several dimensions of the investment climate in which the firm operates that affect whether it continues in business or exits. This paper uses new panel data from 27 Eastern European and Central Asian countries to test the importance of five areas of the business climate on firm exit: the efficiency of government services, access to finance, the extent of corruption or cronyism, the strength of property rights, and the degree of competition. The paper finds that weaknesses in these areas do affect the probability of firm exit – largely in ways that undermine the Schumpeterian cleansing role of exit in raising overall productivity. Greater costs and regulatory burdens raise the probability that more productive firms exit, while less developed financial and legal institutions mitigate forces that would otherwise push less productive firms to exit. Thus, the more productive firms stand to gain the most from improvements in the investment climate, whether that is lowering transaction costs or improving market mechanisms. This holds both within countries and across countries. The impact of a particular investment climate measure can also differ significantly by type of firm, with the focus given to firm size. The differential impact on size can be significant at a size cutoff of 10 or more employees. As these are the firms that are near the threshold of many regulatory requirements, the implications are not just with regard to whether a firm remains in operation, but whether it does so in the formal sector.