How Business Environment Constraints Shape Firm Performance: Evidence From Global Micro-Level Data

This study investigates how business environment constraints shape firm performance using micro-level data from the World Bank Enterprise Surveys (WBES). We assess the impact of access to finance, corruption, electricity reliability, political stability, labour regulations, and infrastructure on productivity and output, measured by total factor productivity (TFP), sales per worker, value added per worker, and sales-to-labour cost ratios. To address endogeneity due to reverse causality, omitted variables, and measurement error, we employ an instrumental variables approach using two-stage least squares (2SLS) estimators. The instruments are derived from national-level indicators capturing structural economic and institutional conditions, including capital formation, inflation volatility, education quality, infrastructure, and governance. The findings show that limited access to finance, unreliable electricity supply, and corruption significantly reduce firm performance across multiple metrics. Political instability exerts no shortterm effect on productivity but adversely influences value added per worker, highlighting its long-term implications for investment and growth. Firms constrained by inadequate human capital also perform worse, highlighting the importance of financial inclusion, infrastructure development, and institutional quality. Policy efforts should focus on improving access to finance, strengthening anti-corruption mechanisms, investing in reliable infrastructure, and enhancing regulatory predictability to foster competitiveness and economic resilience.