This paper examines the impact of investment climate indicators on gross capital formation in developing countries. Based on data from the World Bank Investment Climate Surveys for a sample of thirty-six developing countries, we find that corruption constraint as measured by the share of senior managers that ranked "corruption" as a major or very severe constraint, courts constraint as measured by the share of senior managers that ranked "courts and dispute resolution systems" as a major or very severe constraint, tax administration constraint, loss as a share of sales for those firms reporting a crime such as theft, vandalism or arson in the previous year, management time dealing with officials with regard to requirements imposed by government regulations (e.g. taxes, customs, labor regulations, licensing and registration etc.) as a percent of management time in a given week, and the share of firms with less than 20 employees that have a loan from a formal financial intermediary, linearly affect the share of gross capital formation in the GDP of a developing country. We also note that the coefficient estimate for corruption, loss as a share of sales, and the share of small firms has the unexpected sign and attribute this finding to the severe multicollinearity that exists among these variables and between them and the other variables.
The Impact of Investment Climate Indicators On Gross Capital Formation in Developing Countries
(ProQuest: ... denotes formula omitted.)INTRODUCTIONGiven that in developing countries 53 percent of people live on less than US$2 a day, youth unemployment rate is more than twice the average, and populations are rapidly growing, there is an urgency in expanding employment opportunities for young people. This may be achieved by giving firms of all categories incentives to invest productively, create jobs and expand. Only recently has the role of the investment climate of a country received much attention in the economic development literature. The 2005 World Development Report recognizes the importance of this role when it states that "improving the climate for investment in developing countries is essential to provide jobs and opportunities for young people and to build a more inclusive, balanced, and peaceful world." It looks at the role of governments in creating better climates for investment in such countr...