The Impact of Investment Climate Indicators on Gross Capital Formation in Developing Countries

This paper examines the impact of investment climate indicators on gross capital formation in developing countries. Based on data from the World Bank Investment Climate Surveys for a sample of thirty-six developing countries, we find that corruption constraint as measured by the share of senior managers that ranked "corruption" as a major or very severe constraint, courts constraint as measured by the share of senior managers that ranked "courts and dispute resolution systems" as a major or very severe constraint, tax administration constraint, loss as a share of sales for those firms reporting a crime such as theft, vandalism or arson in the previous year, management time dealing with officials with regard to requirements imposed by government regulations (e.g. taxes, customs, labor regulations, licensing and registration etc.) as a percent of management time in a given week, and the share of firms with less than 20 employees that have a loan from a formal financial intermediary, linearly affect the share of gross capital formation in the GDP of a developing country. We also note that the coefficient estimate for corruption, loss as a share of sales, and the share of small firms has the unexpected sign and attribute this finding to the severe multicollinearity that exists among these variables and between them and the other variables.