Business Environment and Firm Performance in European Lagging Regions

30 Pages Posted: 20 Dec 2017 Last revised: 9 Jan 2018

See all articles by Thomas Farole

Thomas Farole

World Bank

Issam Hallak

European Commission Joint Research Center; KU Leuven - Faculty of Business and Economics (FEB)

Peter Harasztosi

Joint Research Centre, Italy

Shawn Weiming Tan

Independent

Date Written: December 18, 2017

Abstract

This paper explores the relationship between the regional business environment, lagging regions, and firm performance in four European countries: Italy, Poland, Romania, and Spain. It combines firm-level data from Orbis measuring sales, employment, productivity, and profitability, with indicators from recently completed Subnational Doing Business studies in the four countries to examine if and how the business environment is associated with firm outcomes, and whether this is mediated by being located in a lagging region. The results indicate that firms located in regions with better business environments indeed display better performance, in employment and sales growth, as well as profitability. Moreover, the paper finds evidence that being located in a lagging region aggravates the impact of a poor business environment on firm performance. The results also highlight that it matters to distinguish between regions that are "low income" (relatively poor) and those that are "low growth" (stagnating but not necessarily poor). Firm performance, the business environment, and the relationship between the two are much stronger in the latter than in the former. Overall, the results suggest that policies that improve the business environment in lagging regions would be beneficial to the performance of firms in these regions, in growth, profitability, and investment.

Keywords: Technology Industry, Technology Innovation, Equity and Development, Lagging Regional Development, Pro-Poor Growth, Achieving Shared Growth, Employment and Shared Growth

Suggested Citation

Farole, Thomas and Hallak, Issam and Harasztosi, Peter and Tan, Shawn Weiming, Business Environment and Firm Performance in European Lagging Regions (December 18, 2017). World Bank Policy Research Working Paper No. 8281. Available at SSRN: https://ssrn.com/abstract=3090767

Thomas Farole (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Issam Hallak

European Commission Joint Research Center ( email )

1049
Belgium

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Peter Harasztosi

Joint Research Centre, Italy ( email )

Via E. Fermi 1
I-21020 Ispra (VA)
United States

Shawn Weiming Tan

Independent

No Address Available

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