Do Institutions, Ownership, Exporting and Competition Explain Firm Performance?

We analyse a large stratified random sample of firms that provide measures of each firm’s top manager’s perception of the severity of business environment constraints. Specifically, we use the 2005 and 2002 Business Environment and Enterprise Performance Survey (BEEPS) to assess the effect on performance of ownership, competition, export orientation and the business environment of the firm. We employ a variety of approaches to deal with the problem of omitted variables, errors in variables and endogeneity that plague studies in this area. We find that foreign ownership and competition have an impact on performance – measured as the level of sales controlling for inputs. Export orientation of the firm does not have an effect on performance once ownership is taken into account. The centrepiece of our analysis is to understand the impact of perceived constraints. Here we find that few constraints retain explanatory power once introduced jointly rather than one at a time, or when country, industry and year fixed effects are included. Country fixed effects largely absorb the explanatory power of the constraints faced by firms. Replicating the analysis with commonly used country-level indicators of the business environment (Heritage Foundation or Doing Business), or another large data base of firms (Amadeus), also does not yield a robust relationship between constraints and performance. Our analysis indicates that country fixed effects, reflecting time-invariant differences in the business environment but also other factors such as the extent of education or GDP per capita of a country, matter for firm performance, but differences in the business environment observed across firms within countries do not. Moreover, the limited variations in the business environment over time do not affect performance either. The analyst’s ability to identify the effects of business environment on performance, and perhaps the effects themselves, are hence more limited than has been widely argued.