This paper examines whether an effective state-business relationship (SBR) facilitated by an organized private sector improves firm performance in Zambia. Effective SBRs lead to a more optimal allocation of resources in the economy, including an increased effectiveness of government involvement in supporting private sector activities and removing obstacles. Being part of the governance and growth literature, effective SBRs may lead to and prioritize governance reforms. This paper exploits the enterprise survey data of the World Bank Group for Zambia for around 200 firms with data on performance, including data that facilitate the calculation of productivity levels, and on the institutional context facing or perceived by firms. The paper finds that being a member of a business association improves firm performance in Zambia in the form of productivity improvements in the range of 37 to 41 percent. This finding is robust to including other variables that are commonly used to describe the investment climate, and robust to using estimates of productivity that account for endogeneity problems. The results show that the effectiveness of business association works through lobbying government and to a lesser extent through solving of information related market and co-ordination failures. We also find that joining a business association is particularly useful for small and medium sized firms. Further, our results support the view that foreign owned firms lobby the government more effectively than their domestic counterparts.
IPPG Discussion Paper Series Number Five, DFID, London, UK, 24 pp.