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
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.