ABSTRACT
In this chapter, we study the effect of the investment climate on firm performance in India. We use rich micro-level data on manufacturing enterprises in India drawn from the Enterprise Surveys of the World Bank, carried out among the business owners and top managers in 9,281 firms in India, from June 2013 through December 2014. Our data has several measures of the investment climate, which allows us to assess which specific feature of the investment climate matters for firm performance. These variables include time spent on government regulations, number of visits by tax officials, percentage of contract value paid as gift to secure contacts, percentage of total annual sales paid as informal payment, and whether the firm faced any obstacles to obtain an import license and operating license. We use labor productivity as a proxy for firm performance, and regress labor productivity on these variables representing that investment climate that a firm faces in the country. Surprisingly, we find that conventional measures of ease of doing business, such as the amount of time the firm management spend with government officials and the frequency of visits of tax inspectors, are not important in explaining firm productivity. Instead, we find that corruption has a clear and discernible negative effect on firm productivity. This suggests that the focus of Indian policy makers should be on reducing corruption rather than on improving the conventional measures of doing business.
