Corruption, Business Environment, and Small Business Fixed Investment in India
This paper estimates a structural dynamic business investment equation and an error correction model of fixed assets growth on a sample of predominantly small and mid-size manufacturers in India. The results suggest that excessive labor regulation,...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2007/09/8331007/corruption-business-environment-small-business-fixed-investment-india http://hdl.handle.net/10986/7347 |
| Summary: | This paper estimates a structural
dynamic business investment equation and an error correction
model of fixed assets growth on a sample of predominantly
small and mid-size manufacturers in India. The results
suggest that excessive labor regulation, power shortages,
and problems of access to finance are all significant
factors in industrial growth in the country. The estimated
effects of labor regulation, power shortages and access to
finance on the rate of business investment all vary by
states' levels of industrial development and. Perhaps
more importantly, they also depend on a fourth institutional
factor, namely, corruption. The rate of fixed investment is
significantly lower where power shortages are more severe
and labor regulation is stronger over the full sample, but
each of these impacts is also greater for businesses
self-reportedly affected by corruption. Although access to
finance does not seem to influence the rate of investment
for most firms, there is evidence that investment decisions
are constrained by cash flow in enterprises that are
unaffected by corruption or power shortages. There are
nuances to this story as we take into account regional
specificity, but the key result always holds that labor
regulation, power shortages and access to finance influence
the rate of fixed investment in ways that depend on the
incidence of corruption. In interpreting this finding, we
would like to think of corruption as a proxy for the quality
of property rights institutions in the sense of Acemoglu and
Johnson (2005). On the other hand, we regard labor
regulation and the financial environment of small businesses
in India as instances of what Acemoglu and Johnson (2005)
call 'contracting institutions'. The analysis
finds that the interaction between corruption and other
aspects of the institutional environment of fixed investment
decisions could be seen consistent with the Acemoglu-Johnson
view that the quality of property rights institutions exerts
more abiding influence on economic outcomes than the quality
of contracting institutions. |
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