This paper examines whether an effective state-business relationship (SBR) facilitated by an organized private sector improves firm performance in seven sub-Saharan African (SSA) countries: Benin, Ethiopia, Madagascar, Malawi, Mauritius, South Africa and Zambia. We argue that a well-organized and sustained state-business relationship which fulfils the criteria of transparency, reciprocity, credibility and trust can influence firm productivity in at least three important ways: efficient policies and institutions, improved quality and relevance of government expenditure, and finally reduced policy uncertainty. In order to test this, this paper exploits the private enterprise survey data of the World Bank Group for seven SSA countries and focuses on the effects of state-business relations in different countries. The results based on the panel of firms show that being a member of a business association improves firm performance in the form of total factor productivity improvements in the range of 25 to 35 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. Further detailed findings show that the effectiveness of business association works primarily through solving of information related market and co-ordination failures and lobbying government. Membership also increases labour productivity so that positive productivity effects are in part captured by labour; most of these benefits are going to the skilled workers providing positive dynamic incentives throughout the economy. There are significant differences in the effects of membership across countries, ranging from highly significant and positive in Mauritius and Ethiopia to insignificant in Benin and Madagascar, with effects positive and significant in Malawi and Zambia. The size of the effect is correlated with a country specific index capturing factors associated with effective state-business relations, which shows that business associations are most effective when the overall climate for state-business relations is more effective. Membership of business associations also decreases the size of informal payments and improves other investment climate indicators. This provides further evidence for how investment climate reform happens.
IPPG Discussion Paper Series Number Six, DFID, London, UK, 25 pp.