Policy Uncertainty in Hybrid Regimes - Evidence from Firm Level Surveys

Abstract

Abstract: Cross-national surveys suggest that regulatory and policy uncertainty is an important constraint on investment in developing countries. Yet there has been little direct empirical investigation of the sources of this uncertainty. This paper presents evidence of an inverted U-shaped relationship between firms' perceptions of policy uncertainty and political regime type. Firms in hybrid regimes report higher levels of concern over policy uncertainty than those in either strict authoritarian regimes or liberal established democracies. We argue that the explanation lies with a combination of polarized political competition and limited access to credible information and test our theory using survey data of around 10,000 firms from the World Bank-EBRD's Business Environment and Enterprise Performance Survey (BEEPS) from 27 post-communist countries and five OECD countries. Methodologically, we propose a means of controlling for reporting and suppression bias in these surveys when an anchoring vignette is not available.

Keywords: policy uncertainty, political risk, transition economies