Investment Climate and Firm Survival: What does it mean for Latin American Countries?
Posted: 3 Mar 2012 Last revised: 8 Nov 2012
Date Written: January 18, 2012
Abstract
This paper extends the existing literature on the impact of investment climate on the survival rates of firms in the context of Latin American countries. Using unique World Bank datasets that capture several dimensions of investment climate simultaneously, we perform a survival analysis of firms across 12 Latin American countries. To account for interval censoring in the data, we estimate probit regression models to study the impact of investment climate on firm survival, controlling for relevant firm characteristics. We find that weaknesses in the investment climate adversely impact firm dynamics and the composition of surviving firms. Less developed financial and legal institutions counteract forces that would have pushed less productive firms to exit, whereas, greater cost and regulatory burdens increases that probability of more productive firms going out of business. These results hold both within and across countries. Thus, policy measures undertaken to improve investment climate have the potential to positively impact overall firm productivity in the economy and possibly economic growth across these Latin American countries.
Keywords: Investment climate, firm survival, Latin America, interval censoring
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