What is the evidence on links between business environment reform and investment?
This rapid evidence assessment (REA) applies a structured method of identifying, assessing and reviewing evidence to answer the research question: what is the evidence on links between business environment reform (BER) and investment, and what is the effectiveness of linking business environment reforms and investment facilitation/promotion? An initial group of 129 studies were reviewed to determine their type and relevance; 44 were then selected for a more detailed quality assessment, 48% being considered medium quality and 52% high quality. Evidence for the research question was examined in two parts: (1) the impact of BER on investment, and (2) the effectiveness of linking BER and investment facilitation and promotion services.
Cross-country macro-level analysis and national survey data show the link between BER and firm investment. Fourteen studies provided evidence on how BER contributes to increased investment leading to increased profit, value added and revenue. However, firm size influences these effects, with smaller firms benefiting more substantially than larger ones. BER programmes that affect firm behaviour include changes to the legal/regulatory framework for business entry, contract enforcement, labour markets, the judiciary, and the overall quality of the regulatory framework. Studies also highlighted tax reform, finding that improved administration of taxation is a critical aspect of BER. Overall, the strength of the evidence linking BER with increases in firm investment was judged to be ‘medium’.
Beyond the firm level it was more difficult to demonstrate a connection between increased firm investment and broader economic impacts. While increasing firm-level investments are expected to contribute to broader economic growth, many other factors apply here, making it difficult to claim a direct and consistent effect.
No evidence was found directly addressing the effectiveness of linking BER and investment facilitation and promotion, but 11 studies did supply evidence on elements that contribute to this link. BER was found to be critical in attracting and mobilising private investment flows. Relatively consistent evidence shows investors consider the state of the business environment to be more influential than the investment promotion agencies or investment incentives (such as tax incentives), though the latter are often used to market a country and may provide the initial attraction to investors. However, other factors are at play here too, such as the size of the market and the state of essential infrastructure.
Investment promotion agencies have been found to support inward investment in two major ways: first, by addressing information asymmetries; second, by providing a facilitation service, such as a one-stop-shop, that helps investors navigate the bureaucracy and comply with the legal and regulatory framework. Perhaps unsurprisingly, these services were found to be more beneficial to investors in developing economies as they help them to understand and find their way through a difficult business environment.
White, S.; Fortune, P. Business Environment Reform and Investment Promotion and Facilitation. DFID, London, UK (2015) 55 pp.