Who Survives? The Impact of Corruption, Competition and Property Rights across Firms

Size, age, sector, and productivity are
commonly cited as factors determining a firm s survival.
However, there are several dimensions of the investment
climate in which the firm operates that affect whether it
continues in business or exits. This paper uses new panel
data from 27 Eastern European and Central Asian countries to
test the importance of five areas of the business climate on
firm exit: the efficiency of government services, access to
finance, the extent of corruption or cronyism, the strength
of property rights, and the degree of competition. The paper
finds that weaknesses in these areas do affect the
probability of firm exit largely in ways that undermine
the Schumpeterian cleansing role of exit in raising overall
productivity. Greater costs and regulatory burdens raise the
probability that more productive firms exit, while less
developed financial and legal institutions mitigate forces
that would otherwise push less productive firms to exit.
Thus, the more productive firms stand to gain the most from
improvements in the investment climate, whether that is
lowering transaction costs or improving market mechanisms.
This holds both within countries and across countries. The
impact of a particular investment climate measure can also
differ significantly by type of firm, with the focus given
to firm size. The differential impact on size can be
significant at a size cutoff of 10 or more employees. As
these are the firms that are near the threshold of many
regulatory requirements, the implications are not just with
regard to whether a firm remains in operation, but whether
it does so in the formal sector.