Financial and Private Sector Department Africa Region

Madagascar Investment Climate Assessment Update

Regional Program for Enterprise Development (RPED) Africa Financial and Private Sector Development (AFTFP) June 13, 2010

Table of Contents
Executive Summary....................................................................................................................................... 4 Introduction .................................................................................................................................................. 7 Survey Instrument and Coverage.............................................................................................................. 7 Comparator Countries ............................................................................................................................ 10 Chapter 1: Macroeconomic and Political Background................................................................................ 11 Political Environment .............................................................................................................................. 11 Macroeconomic Indicators ..................................................................................................................... 11 Fiscal Policy ............................................................................................................................................. 14 Economic Structure ................................................................................................................................. 14 External Sector ........................................................................................................................................ 16 Chapter 2: Firm Growth and Productivity ................................................................................................... 19 Introduction ............................................................................................................................................ 19 Firm Performance in a Cross-Country Perspective ................................................................................. 21 Characteristics of Sample Firms .......................................................................................................... 21 Cross-Country Regression Analysis ..................................................................................................... 27 Understanding Firm Heterogeneity .................................................................................................... 35 Evolution of Firm Performance in Madagascar ...................................................................................... 37 The Micro and Informal Sectors ............................................................................................................. 40 Chapter 3: External Factors Affecting Firm Performance ........................................................................... 46 Introduction ............................................................................................................................................ 46 Infrastructure .......................................................................................................................................... 46 Electricity............................................................................................................................................. 48 Transportation Issues.......................................................................................................................... 55 Transaction Costs .................................................................................................................................... 61 Doing Business .................................................................................................................................... 61 Crime ................................................................................................................................................... 62 Corruption ........................................................................................................................................... 68 References .................................................................................................................................................. 72 2|Page

Appendix to Chapter 2 ................................................................................................................................ 74 Appendix to Chapter 3: ............................................................................................................................... 78 Additional Tables .................................................................................................................................... 78 Tests of whether coefficients are equal...................................................................................................... 83 Electricity (OLS) ................................................................................................................................... 83 Electricity (probit) ............................................................................................................................... 85 Transport (tobit).................................................................................................................................. 87 Crime (tobit) ........................................................................................................................................ 88 Corruption (OLS) ................................................................................................................................. 89 Corruption (Probit).............................................................................................................................. 90 City-country dummies included in the regressions: .................................................................................. 91 Additional econometric results ................................................................................................................... 92 Probit (marginal effects): Electricity ( % sales lost to power outages) ............................................... 92 Probit (marginal effects): Electricity ................................................................................................... 93 Probit (marginal effects): Corruption.................................................................................................. 96

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Executive Summary1
This Investment Climate Assessment Update (ICAU) evaluates trends and characteristics associated with firm growth and performance in Madagascar, prior to the current political crisis. More specifically, the ICAU examines firm-level growth and productivity, and how they are related to firm characteristics and to certain potential obstacles facing firms in manufacturing and services during the period 2004-2007. Most of the analysis in this report is based on data from two Enterprise Surveys conducted in Madagascar in 2005 and 2008 (which report data on 2004 and 2007, respectively). Firm performance and the investment climate in Madagascar are also compared with a set of comparator countries in Africa, namely Cote dIvoire, Kenya, Mauritius, Rwanda, South Africa, Tanzania, and Uganda; and in other regions, namely India, Malaysia, and Vietnam. The analysis of firm-level data suggests a high degree of heterogeneity even within sectors. Firm performance and firm growth vary considerably by firm size and there are large dispersions of labor productivity both within Madagascar and relative to comparator countries. In Madagascar, the labor productivity dispersion appears to have widened between 2004 and 2007, while the mean and median levels declined over the same period. The implication from the micro evidence is that the performance of the private sector was already sub-optimal during a period when the economy was growing and the macro environment relatively stable. During the period under analysis, most of the employment growth was accounted for by medium and large companies, rather than micro and small firms, as found by developed country studies. While studies in developed countries have found a negative relationship between size and growth, with smaller companies growing faster than larger ones, in Madagascar we found evidence of an inverted-U relationship between growth and size, with larger companies growing faster than smaller ones up to a certain size (above 100 employees). We found evidence of an inverted-U relationship between firm productivity and firm size, with firm productivity increasing with firm size up to a certain large size before stagnating or declining. We find that small firms are less productive than large ones up to a certain threshold, when productivity growth becomes stagnant or declines. These results point towards the existence of market distortions and barriers to the expansion of small and medium enterprises (SMEs). The analysis of firms constraints shows that external factors such as access to infrastructure and transaction costs (crime and corruption) also vary considerably with firm size, posing more significant problems as firms grow, thereby potentially introducing an incentive for firms to remain small. Other explanations that are not pursued in this report are related to rigidity in
The preparation of this note was a team effort. Bruce Byers (Consultant) is responsible for the analysis in Chapter 2 and provided inputs into the overall report, Sarah Tulman (Consultant) prepared first drafts of chapters 1 and 3, Leonardo Iacovone (TTL) prepared the structure of the report, provided inputs in each one of the chapters, overall coordination, and reviewed the entire report. The report was produced under the guidance of Michael Fuchs (Acting Sector Manager) and Marilou Uy (Director). Additionally, very useful inputs and comments were provided by Alvaro Gonzalez.
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factor markets and financial constraints preventing efficient allocation of resourcessmaller firms that are efficient cannot find resources to invest and grow.2 Financial constraints could be playing a particularly significant role because of the lumpiness of some investments such as buying a generator or protecting a company from crime and theftinvestments that SMEs are unable to afford and banks are unwilling to finance. We confirm the existence of resource misallocation by showing that growth and productivity do not appear to be positively correlated. Surprisingly, plotting employment growth and productivity on a graph presents a cloud in which we cannot distinguish any positive relationship pointing towards the fact that these two variables are orthogonal. More productive firms are not necessarily growing more than less productive ones. This finding implies that there may be large inefficiencies in the economy due to the misallocation of resources towards unproductive firms. Due to the business environment, these firms can survive and indeed expand, while more productive firms do not necessarily grow. In other words, the market mechanisms determining which firms survive and succeed do not function according to productivity. This, then, implies that firm success relates to other abilities, such as, perhaps, the ability to cope in a difficult business environment. Some results are consistent with previous studies: as expected, capital intensity is strongly and positively associated with labor productivity. Public and private limited companies are also found to be positively associated with higher productivity. If SMEs indeed face above-average financial constraints, this is likely to impact their capital intensity and thus their productivity, perhaps partially explaining our results. We also find that exporters and firms holding foreign licenses are more productive but, surprisingly, do not grow faster. Additional results show that holding a foreign production license and exporting are also strongly associated with higher labor productivity, although neither is associated with firm growth. Indeed, this is consistent with the results mentioned above that productivity and firm growth appear to be broadly uncorrelated. We provide some evidence that some of the main constraints faced by firms worsened between 2004 and 2007. Although we do not directly analyze the relationship between managers perceptions of firm constraints and productivity, it is clear that higher costs for generating electricity at the firm level, paying for security, and losses in transit and due to crime have an impact on firm productivity. Further, the fact that the perception of crime has increased with concerns about political stability suggests that firms are facing greater challenges in remaining competitive than in 2004. Informality appears to be a rational choice in an environment where being formal and small is particularly challenging. The analysis of Malagasy micro-enterprise data suggests that formality for these micro firms is negatively associated with productivity, and therefore that these firms suffer from their formal status. This is likely to relate to the substantial burden to very small firms of complying with government regulations, and the apparently high costs of maintaining a stable electricity supply and security.
2

The distortionary effect of labor regulations in Madagascar is discussed in Pierre (2008).

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In a difficult business environment, micro companies operate informally to maximize their productivity. Our results suggest that many micro firms may operate informally in order to maximize their productivity, something which may lead to threshold effects in the firm growth pathfirms will be unwilling to grow beyond a certain size where informality becomes hard to maintain. This would also tie in with the findings on growth and productivity, and the implications of the analysis of security and access to reliable infrastructure: if conditions require firms to self-finance electricity and security, and credit access is limited for small firms, the opportunities for firm expansion are small and therefore the incentives to formalize very limited. All the analyses taken together suggest the presence of strong distortionary effects on firm behavior and performance, with a resultant misallocation of resources within the economy. These results suggest two key policy messages. First, there is a need to tackle distortions and barriers to firm growth that are responsible for a situation where more productive firms are unable to grow faster and unleash their potential. Second, improvements in the business environment, in particular for micro and small firms, are fundamental to encourage firms to operate in the formal sector and provide a basis for further firm expansion. Our conclusions suggest that future analyses should focus on the following issues: i. ii. iii. iv. How factor markets and their contribution to the distortions which hinder firm growth The barriers or lack thereof to firm transitions from informality to formality How firm growth and productivity relate to issues of access to and demand for credit The impact of the loss of AGOA on firm performance and exports

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Introduction
Given the need to improve the overall investment climate in the Republic of Madagascar, an Indian Ocean island nation located off the east coast of Africa, this Investment Climate Assessment Update (ICAU) evaluates trends and characteristics associated with firm growth and performance.3 More specifically, the ICAU examines firm-level growth and productivity, and how they are related to firm characteristics and to certain obstacles facing firms in manufacturing and services during the period 2004-2007. The scope of this report is narrower than that of a typical Investment Climate Assessment (ICA). This is a result of the political situation in Madagascar and data availability. The current political crisis will likely have significant consequences for incentives to invest, and on firm growth and performance in both the domestic and export markets. However, these impacts are hard to identify while the crisis is ongoing. In addition, the enterprise survey data used in this report are entirely pre-crisis (covering the period 20042007). Therefore, with the exception of parts of Chapter 1 on the macroeconomic and political background, this report will focus on the pre-crisis period. Nevertheless, the analysis will focus on trends that we expect to be structural rather than cyclical and which therefore will be informative in terms of setting the basis for policy dialogue with the Government of Madagascar when the crisis recedes. Most of the analysis contained in this ICAU is based on data from two Enterprise Surveys conducted in 2005 and 2008 (which report data on 2004 and 2007, respectively).4 As well as comparing the full samples for both years, we are also able to follow a certain panel of firms included in both surveys. A summary of the firms, both overall and those present in the panel, are shown in Tables i.1 and i.2 below. Given that information on the 2005 survey is available in the Madagascar Investment Climate Assessment (June 2005), the description below will focus on the 2008 survey.5 The 2008 survey covers micro, small, medium-sized, and large enterprises in manufacturing and services in urban areas and was conducted between September 2008 and February 2009. It provides information on firm performance, firms perceptions about the investment climate, and objective measures of the obstacles to firm operations and growth. Because similar surveys have been conducted in more than 100 countries throughout the World, including about 40 in Sub-Saharan Africa, Madagascars investment climate and its firms performance can also be benchmarked against the investment climate of other countries in Sub-Saharan Africa and other regions.

Survey Instrument and Coverage

As noted above, the survey for the 2004 data was undertaken in 2005 and for the 2007 data between September 2008 and February 2009. A basic overview of the 2004 databy number of firms, size of
The importance of the investment climate and, in particular, barriers to entry, is highlighted as one of the three key constraints to private sector growth analyzed by the Madagascar Country Economic Memorandum (World Bank 2008). 4 Data from both surveys are available online from http://www.enterprisesurvey.org. 5 It is important to note that these two surveys are not fully compatible in terms of variables collected and sampling strategy. For this reason, we can only focus on a restricted number of variables when analyzing the dynamics in the panel.
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firms, region, ownership structure, size, and sectorcan be seen below in Table i.1, and more information can be found in the Madagascar Investment Climate Assessment (World Bank 2005). The 2008 survey covered 480 formal firms (including 111 registered/formal micro businesses) and 124 informal businesses in four locations: Antananarivo, Mahajanga, Toamasina, and Antsiranana.6 The sample was defined following the usual ICA rules, and firms were selected through a random stratified sampling procedure with proportional allocation. The sample includes: 258 formal manufacturing firms, or 18 percent of existing manufacturing firms; 149 formal retail firms, or 8 percent of existing formal retailers in the country; 141 firms in other formal sectors (wholesale, construction/transport, hotels/restaurants, IT, etc.), or 6 percent of existing firms in other sectors of the formal economy; 111 informal firms. The sampling procedure was to survey a non-registered establishment similar to each registered micro establishment surveyed.

Formal manufacturing is always covered in the Enterprise Survey for comparability reasons. It is, in effect, the only set of data available on a consistent basis across surveyed countries/continents and is therefore essential for benchmarking firms performance and will be the relevant sample for the Investment Climate Assessment Update (ICAU). Beginning in 2006, the service sectors have been included in the surveys in order to increase the coverage of formal sectors providing information on investment climate issues.7 The survey questionnaire is composed of four major parts:8 i. The first part is designed for general managers or business owners and deals with the internal structure of businesses and the investment climate within which they operate, including bureaucratic obstacles and infrastructure constraints; The second part deals with finances, production, and markets, and provides information on business performance which can be mapped to business characteristics and investment climate obtained in the first part of the questionnaire. The detailed accounting data will allow a comparison of the competitiveness of industries in Madagascar with competitor countries in Africa and Asia, as well as estimate trade policy indicators. The third part of the questionnaire deals with human resources and labor market issues, particularly the effects of government labor regulations on the cost of doing business, and the structure, cost, and quality of the workforce;

ii.

iii.

The 2005 survey also covered Antsirabe, which was not included in the 2008 survey. Not covered in the 2005 survey. 8 Since 2006, the questionnaires of all Enterprise Surveys have been standardized, which allows for comparability across different countries.
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iv.

The last part includes a small questionnaire for a sample of up to 10 workers per business. This data facilitates an understanding of the interaction between firm performance/business climate and poverty/labor market outcomes.

Weights were calculated so that results from the survey could be extrapolated to the entire urban economy.9 Table i.1 presents a more complete breakdown of the firms included in the 2008 data, and Table i.2 presents analogous information for firms that were included in both survey years.
Table i.1: Breakdown of firm characteristics by region, ownership, size, and sector (all firms) 2004 290 2007 442 Establishment size: 84% 5% 3% 2% 5% Sectors: Food Garments Textiles Machinery & Equipment Chemicals Plastics & Rubber Fabricated Metal Products Ownership: Public Ltd Co. LLC Sole proprietorship Partnership Other Source: Enterprise Surveys. 1% 67% 30% 1% 1% 60% 40% 0% 0% Other Manufacturing Retail Wholesale Construction Transport Other Services 15% 18% 10% 3% 6% 7% 4% 38% 10% 12% 3% 0% 2% 0% 1% 15% 18% 15% 6% 7% 9% 76% 7% 13% 3% Micro & Small (0-19 Workers) Medium (20-99 workers) Large (100+ workers) 36% 37% 28% 40% 44% 16% 2004 2007

Total Number of firms: City: Antananarivo Mahajanga Toamasina Antsiranana Antsirabe

Weights are not available for the 2005 survey.

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Table i.2: Breakdown of firm characteristics by region, ownership, size, and sector (firms in both surveys) 2004 135 2007 135 Establishment size: Micro & Small (0-19 Workers) Medium (20-99 workers) Large (100+ workers) 2004 2007

Total Number of firms: City: Antananarivo Mahajanga Toamasina Antsiranana Antsirabe

85% 8% 4% 2% 1%

85% 8% 4% 2%

34% 47% 19%

30% 52% 18%

Ownership: Public LLC Sole proprietorship Partnership Other

1% 63% 33% 1% 1%

59% 41%

Sectors: Food Garments Textiles Machinery & Equipment Chemicals Plastics & Rubber Fabricated Metal Products Other Manufacturing Retail Wholesale Construction Transport Other Services

18% 13% 13% 4% 7% 7% 4% 35%

18% 16% 9% 7% 1% 4% 41% 1% 1% 1%

Source: Enterprise Surveys.

Comparator Countries
Throughout this report, firm performance and the investment climate in Madagascar are compared with a set of comparator countries. These are: Africa: Cote dIvoire, Kenya, Mauritius, Rwanda, South Africa, Tanzania, and Uganda. Other regions: India, Malaysia, and Vietnam. We choose India, Malaysia, and Vietnam because of their strong export performance, and their textile and garments exports in particular. In addition, Malaysia is rich in natural resources. Another reason for the choice of these comparator countries is their relative endowments, as these countries are labor abundant, and in particular rich in terms of the relative share of unskilled workers. It is also important to benchmark Madagascar against other low and middle-income countries in SubSaharan Africa. Cote dIvoire exports are dominated by agricultural products, similarly to Madagascar where an important shares of its exports still come from crops such as vanilla and coffee. Mauritius, as well as being a neighboring country, has a large textile manufacturing sector which is driven by export processing zones (EPZs), as is the case for Kenya and Tanzania. Rwanda is chosen as an example of a 10 | P a g e

post-conflict Sub-Saharan African nation. Although Uganda and South Africa do not have EPZs, they do have substantial textile industries and for that reason are also interesting comparator countries. Additionally, South Africa and Mauritius represent two important regional benchmarks in terms of their firms high performance.

Chapter 1: Macroeconomic and Political Background10

This chapter presents the macroeconomic trends and conditions and recent political reforms that are likely to influence private sector growth and investment. It also benchmarks macroeconomic performance against the comparator countries. Macroeconomic indicators are explored, as well as the structure of the economy, exports, and the current political situation. Growth in Madagascar has been strong in recent years, certainly until the recent political crisis. However, much of the currently available data do not reflect the effects of the political instability and global economic downturn, which have negatively impacted both the external and domestic sectors of the Malagasy economy. The economic future of Madagascar is highly dependent upon the resolution of political instability and the state of the global economy, implying considerable uncertainty.

Political Environment
Madagascar has been rocked by political turmoil this past year, culminating in the ousting of President Marc Ravalomanana in March 2009 and the creation of a transitional authority, the Haute Authorit pour la Transition (HAT). The full extent of its economic impact remains to be seen, but in combination with the global economic downturn, it has already impacted tourism, exports, public investment, and foreign aid, highlighted in the following sections along with longer-term patterns. The agreements reached between Madagascars four main political parties in August 2009 in Maputo, Mozambique and in November 2009 in Addis Ababa, Ethiopia have broken down. The HAT plans to stage legislative elections in May 2010, update but this lacks the support of the African Union and of donors. Mr. Rajoelinas failure to honor previously signed agreements contributed to Madagascars suspension from the United States African Growth and Opportunity Act (AGOA), which will impact textile and garments exports to the United States. In addition, it has led to a freeze of all remaining foreign aid, excluding humanitarian aid.

Macroeconomic Indicators
Before the crisis, Madagascar had been successfully following a set of liberalization policies, with economic growth averaging more than 5 percent. Nonetheless, it remains one of the poorest nations in
10

Sources of information and data for this chapter: World Development Indicators (World Bank), International Financial Statistics (IMF), and Direction of Trade (IMF) datasets; Country Profile (2008) and Country Reports (September 2009 and March 2010) from the Economist Intelligence Unit; and Madagascar Economic Update (World Bank) reports from September 15, 2009, October 20, 2009, November 21, 2009, and February 1, 2010.

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the world, with a poverty gap (at US$1.25/day) of 26.5 percent as of 2005, and a growth rate that still is far below what is required to lift Madagascar out of the least-developed countries (LDCs) group. Between 1960 and 1999, real GDP per capita fell by more than one third. Between 2000 and 2008, real GDP per capita increased by 6.7 percent, at an average annual rate of 1.1 percent, or excluding 2002 when a post-electoral crisis led to a fall of approximately 15 percent in real GDP per capitaat an average annual rate of 3.1 percent. The Economist Intelligence Unit (EIU) estimates that real GDP fell by 1.0 percent in 2009, and forecasts further contractions of 1.3 percent in 2010-2011. In contrast, official Government estimates show real GDP growth of 0.6 percent in 2009, and project 2.7 percent growth in 2010. These estimates would be worse even more discouraging if measured per capita, as population growth rate is estimated at approximately 2.6 percent. Table 1.1 shows some development and macroeconomic indicators for Madagascar and its comparator countries. Relative to comparator countries, Madagascar is one of the poorest countries in the group, with a GNI per capita among the lowest and a poverty headcount approximately 26 percent higher than all but Tanzania and Rwanda. Its average GDP per capita growth was also among the lowest. Madagascars GINI coefficient, at 47.2, is one of the highest, other than Kenya, Cote dIvoire, and South Africa, reflecting high levels of income inequality. However, inflation in 2008, at 9.2 percent, was at the lower end of the scale, and the only sub-Saharan African nation among the comparator countries which had a lower inflation rate that year was Cote dIvoire.
Table 1.1: Country-level comparisons, macroeconomic and development indicators Population (millions) Poverty gap (%) GINI index GNI per capita, Average per capita at US$1.25/day PPP 2008 Madagascar Cote d'Ivoire India Kenya Malaysia Mauritius Rwanda South Africa Tanzania Uganda Vietnam 19.1 20.6 1140.0 38.5 27.0 1.3 9.7 48.7 42.5 31.7 86.2 2005 26.5 6.8* 10.5 6.1 0.5*** .. 38.2**** 8.2**** 46.8**** 19.1 4.6***** 2005 47.2 48.4* 36.8 47.7 37.91*** .. 46.7**** 57.8**** 34.6**** 42.6 37.8***** Atlas method (current USUS$) 2008 410 980 1070 770 6970 6400 410 5820 440 420 890 2000-2008 1.1 -2.1 5.6 1.3 3.5 3.4 4.3 2.7 3.8 3.9 6.2 2000-2008 4.0 0.1 7.2 4.0 5.5 4.3 7.4 4.1 6.6 7.3 7.5 2008 9.2 6.3 8.3 26.2 5.4 9.7 15.4 9.8 10.3 12.1 23.1 GDP growth (%) Average GDP growth (%) Inflation (%), CPI

* 2002 **2003 ***2004 ****2000 *****2006 Source: World Development Indicators.

The goals of Madagascars central bank (Banque Centrale de Madagascar, or BCM) are to control inflation and to maintain the stability of the local currency, the ariary. Tight monetary policy has helped to lower inflation from 18.5 percent in 2005 to approximately 9 percent in 2009, as shown in Figure 1. 12 | P a g e

However, BCMs pragmatism and conservatism, which has helped to prevent a collapse of the monetary position over the past year, could be threatened by interventionist political interference aimed at expansionary policy.
Figure 1.1: Annual inflation rate 20.0% 15.0% 10.0% 5.0% 0.0% 2003 -5.0% 2004 2005 2006 2007 2008 2009

Source: IMF, International Financial Statistics.

Interest rates and changes in the monetary aggregates can be seen in Table 1.2. Interest rates, after increasing and then decreasing again during the period from 2003 to 2009, remained stable in 2009, relative to what they had been in 2008. While the deposit rate fluctuated during the period between 2003 and 2009, it ended the period at the same rate at which it began. Lending rates, on the other hand, increased from 24.3 percent in 2003 to 45.0 percent in 2007-2009. The monetary aggregates increased moderately.
Table 1.2: Interest rates and changes in monetary aggregates 2003 Money market rate Deposit rate Lending rate M1 (% change, year on year) M1 (% change, year on year) 10.5% 11.5% 24.3% 4.2% 8.8% 2004 16.5% 15.2% 25.5% 19.4% 25.2% 2005 16.5% 18.8% 27.0% 1.1% 2.2% 2006 14.5% 22.3% 29.5% 23.8% 26.4% 2007 11.0% 16.5% 45.0% 18.5% 20.9% 2008 11.5% 11.5% 45.0% 9.1% 12.8% 2009 10.0% 11.5% 45.0% 6.0% 11.2%

Source: IMF, International Financial Statistics.

Figure 1.2 shows the evolution of the exchange rate (average, AR/US$) during the period between 2003 and 2009. There was substantial depreciation of the ariary against the dollar between 2003 and 2006, and then the ariary began appreciating. In 2009, the ariary depreciated against the dollar by almost 13 percent. Inflation still fell slightly in spite of this depreciation, because of downward pressure on prices due to the good harvest of rice.

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Figure 1.2: Exchange rate (average, AR/US$) 2500.000 2000.000 1500.000 1000.000 500.000 0.000 2003 2004 2005 2006 2007 2008 2009

Source: IMF, International Financial Statistics.

Total domestic borrowing in 2009 was 2.2 percent of GDP, and at the end of 2009 the value of cumulative treasury bills outstanding was only 13.8 percent higher than in 2008. The decline in the T-bill yield from 9 percent in May-June to 6.5 percent in November-December reflects a lack of pressure on the T-bill market.

Fiscal Policy
From the mid-1990s until the ousting of President Ravalomanana, the Government implemented three consecutive poverty reduction and growth facilities (PRGF) with the IMF, with the pace of reform accelerating after Ravalomanana became president in 2002. Tax revenue grew rapidly in the pre-crisis years, from US$548 million in 2003 to US$858 million in 2007. Public expenditure rose during this time, driven by the rising public-sector wage bill and heavy capital expenditure (41 percent of GDP in 2007). In 2009, there was a large shortfall in fiscal revenues, which were approximately one quarter lower than projected in the 2009 Law of Finance. Customs revenues were only 64 percent of initial targets, and domestic tax revenues were 84 percent of initial target. Non-tax revenues were consistent with initial targets. Between 2003 and 2008, public investment increased by an average of 30 percent per year. In 2009, it fell by an estimated US$200 million, or 30 percent in real terms. Foreign aid has declined, but the impact in 2009 was somewhat muted because most donors continued their activities until March 2009 and preserved their humanitarian aid and ongoing investment projects. Approximately US$100 million of budget support was suspended in December 2008.

Economic Structure
As of 2007, agriculture employed 80 percent of Madagascars labor force, but only accounted for approximately one quarter of GDP. Most of the population survives on subsistence farming, and agricultural output is hampered by low crop yields due to lack of irrigation, and weather-related issues such as cyclones and flooding in the northern and eastern areas and drought in the south. The commercialization of this output is further hampered by poor transport links, and farmers weak

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property rights and lack of access to credit. Although approximately half of the land area is cultivable, only 5 percent is used for growing crops.
Table 1.3: Real GDP by sector (% share of GDP) 2003 Agriculture Industry Services 29.2 15.4 55.4 2004 28.7 15.9 55.3 2005 27.9 15.8 56.4 2006 27.1 15.8 57.0 2007 26.8 15.8 57.4

Source: Economist Intelligence Unit.

The agricultural sector fared well in 2009, benefiting from previous investments and favorable weather conditions. Rice production, which accounts for 70 percent of farm output, grew between 10 and 15 percent compared to 2008. Other important crops are vanilla, coffee, and cotton. There are also significant fishing, aquaculture, and commercial forestry sub-sectors. Services accounted for approximately 57 percent of GDP and 12 percent of the labor force in 2007. Key services include government administration, maritime transport services, and tourism. Between 2003 and 2008, tourism grew at an average rate of 8 percent per year, from not quite 150,000 visitors in 2003 to approximately 370,000 visitors in 2008. The political crisis, in conjunction with the global economic crisis, has hit tourism hard. Tourist arrivals fell to 162,687 visitors in 2009, a 56 percent decline vs. 2008. Hotel revenues fell by 70 percent. The decline in tourism puts at risk approximately 30,000 jobs. Industry accounted for approximately 16 percent of GDP and 8 percent of the labor force in 2007. Manufacturing in Madagascar has been driven by the EPZ, and the country has become a major center for the production of textiles and garments for export to the United States and the European Union. In October 2008, the Government announced plans to wind down the EPZ system, and replace it with other export promotion measures. Then, in light of the lack of progress towards restoring democratic rule, in December 2009 the United States suspended Madagascars trade privileges under the African Growth and Opportunity Act (AGOA), effective as of January 1, 2010. Because of this, along with the liberalization of textiles markets and the effects of political uncertainty and the global economic crisis, the future of the textiles sector in Madagascar is uncertaint. In recent years there have been large inflows of foreign investment to develop the countrys natural resources, and several mining projects are under development. Among the largest of these are the Sherritt-led Ambatovy nickel and cobalt project in the east (aiming to produce 60,000 tons per year of nickel and 5,600 tons per year of cobalt), which is expecting to begin shipments in late 2010 or 2011, and QMM/Rio Tintos ilmenite sands project at Taolagnaro (aiming to produce 750,000 tons per year of mineral sands), which began production in May 2009. Oil companies are prospecting for gas and oil onshore and offshore, including Totals program of oil drilling in the west. There are also projects underway to develop reserves of coal, uranium, gold, bauxite, and diamonds; and graphite, marble, and mica are being mined on a smaller scale.

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Foreign direct investment (FDI) inflows grew at average rate of 140 percent per year between 2003 and 2008. However, they declined 19 percent between September 2008 and 2009, in part because of the end of construction activities at QMM/Rio Tintos ilmenite sands project. Between 2003 and 2008, the construction sector accounted for almost one-fifth of economic growth, benefiting from foreign aid for post-cyclone reconstruction programs and long-term development, and a surge in homebuilding and home improvement in Antananarivo. It was also beginning to benefit from the mining projects and from Government efforts to restore the roads network. However, the recent cutbacks in public investment, notably in infrastructure, contributed to the 40 percent decline in the construction sector in 2009. Table 1.4 presents some statistics on economic structure for Madagascar and its comparators. Growth in Madagascar has been strong in recent years, although the data do not reflect the effects of the more recent political instability and global economic downturn. Value added in agriculture, manufacturing, and services, and growth in manufacturing in Madagascar are in line with the those of its comparator countries. Madagascars performance with respect to gross fixed capital formation is higher than its comparators, and net FDI is lower.
Table 1.4: Country-level comparisons, economic structure Average growth in Manufacturing value added (%) 2000-2008 4.9 -1.3 7.3 3.6 6.5* 1.4 6.6* 4.0 7.3* 6.3 11.9* Value added, Agriculture (% of GDP) 2008 25.2 23.7 17.6 21.3 .. 4.5 34.6 2.8 .. 22.7 .. Value added, Manufacturing (% of GDP) 2008 15.3 16.8 16.0 9.1 .. 19.4 5.2 18.5 .. 7.6 .. Value added, Services (% of GDP) 2008 57.5 51.0 53.4 65.3 .. 67.9 53.1 65.9 .. 51.5 ..

Gross fixed Capital formation (% of GDP) 2008 Madagascar 35.7 Cote d'Ivoire 10.1 India 34.6 Kenya 24.7 Malaysia .. Mauritius 24.2 Rwanda 20.8 South Africa 22.2 Tanzania .. Uganda 23.3 Vietnam .. Source: World Development Indicators. * 2000-2007.

Net FDI (% of GDP) 2007 3.2 3.8 3.6 4.6 4.3 3.9 10.9 8.0 6.4 7.0 6.6

External Sector
Between 2003 and 2008, Malagasy exports grew at an average rate of 20 percent per year. Along with EPZ exportsmostly textiles and garmentsof US$824 million in 2008 (up from US$700 million in 16 | P a g e

2007), Madagascars largest export categories as of 2008 were vanilla (US$42 million, down from US$56 million in 2007), shellfish and fish (US$28 million, down from US$39 million in 2007), and coffee (US$14 million, down from US$17 million in 2007). The five largest markets for Malagasy exports as of 2008 were, in descending order: France (39.6 percent of total exports), the United States (20.6 percent), Germany (5.1 percent), China (3.4 percent), and Italy (3.2 percent). The largest import categories as of 2008 were capital goods and raw materials (US$1824 million, up from US$499 million in 2007), fuel (US$547 million, up from US$390 million in 2007), consumer goods (US$391 million, up from US$305 million in 2007), and food (US$156 million, up from US$130 million in 2007). The five largest markets for Malagasy imports as of 2008 were, in descending order: China (29.1 percent of total imports), Bahrain (12.5 percent), France (9.1 percent), South Africa (8.2 percent), and the United States (7.1 percent). In addition, the fact that the value of imports was equivalent to 51.6 percent of GDP in 2008 (see Table 1.5), is evidence that Madagascar is highly dependent on imports. This leaves Madagascar exposed to global price changes, as happened in 2008 when the rise in food and fuel prices played a large role in keeping the central bank from attaining its annual target of 7.1 percent. Table 1.5 presents the percentage of GDP represented by exports and imports,11 and annual export and import growth. Several patterns emerge from the data. First, within each measure (percentage of GDP and annual growth rate), changes in exports and imports generally moved together directionally. Second, exports as a percentage of GDP, although it fluctuates, remains much more stable than imports as a percentage of GDP. With the exception of the decline in imports as a percentage of GDP, this percentage either remained the same or increased in every year after the 2002 recession. As of 2008, imports had increased to 51.6 percent of GDP from 32.1 percent in 2003, while in 2008 exports as a percentage of GDP was 26.3 percent vs. 23.1 percent in 2003. In addition, in every year, the measure of imports as a percentage of GDP was larger than the comparable measure of exports. Neither exports nor imports grew at a consistently higher rate than the other.
Table 1.5: Exports and imports 2003 Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Exports of goods and services (annual % growth) Imports of goods and services (annual % growth) Source: World Development Indicators. 23.1% 32.1% 39.0% 56.8% 2004 32.6% 47.5% 9.8% 8.9% 2005 26.9% 41.1% 2.2% -8.8% 2006 29.9% 41.1% 14.6% 4.3% 2007 30.4% 46.8% 25.0% 21.8% 2008 26.3% 51.6% 2.9% 15.6%

Exports have suffered because of the political crisis and the global economic downturn. During the first three quarters of 2009, exports fell 18 percent vs. the same period in 2008, with textiles declining 30
11

Note that while exports measured as a percentage of GDP can be thought of as exports contribution to GDP, imports measured as a percentage of GDP cannot be thought of that way, because the proceeds from imports go towards the GDPs of the countries of origin.

17 | P a g e

percent and prawns declining 42 percent. The combined impact of the state of global economy and the political crisis has also hurt the textile industry, which in the first half of 2009 had already fallen 30 percent from a year earlier because of the global economic crisis. The suspension from AGOA as of January 1, 2010 will also adversely affect Malagasy exports. The United States accounts for approximately 40 percent of all textiles exports, and approximately 20 percent of total exports, from Madagascar. Within the textiles sector, approximately 130,000 jobs are at stake, mostly concentrated around Antananarivo. Imports also fell in 2009, in response to lower food and oil prices, the completion of construction on the Rio Tinto ilmenite project, and the suspension of many public works projects. In the first nine months of 2009, imports fell by 22 percent. This would have been larger if not for the increase in food imports (up 35 percent in September 2009 vs. September 2008) due to the halt in operations at Tiko, owned by former President Ravalomanana, which had been the main domestic producer of edible oils and dairy products. Figure 1.3 shows the quarterly data on exports and imports, and the trade balance, from 2003 until the third quarter of 2009. While this period shows an overall trend of worsening of the trade balance, in the third quarter of 2009 there was a slight improvement in the trade balance due to a decline in imports and the slight increase in exports.
Figure 1.4: Exports and imports 1500

1000

500

0 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009

-500

-1000

Exports ($millions)

Imports ($millions)

Trade Balance

Source: IMF, Direction of Trade. Trade balance should be upper and lower case

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Chapter 2: Firm Growth and Productivity

Introduction
Following the economic overview, this chapter uses firm-level data to examine the performance of Malagasy firms during the pre-crisis period (2004-2007). Three types of analysis are employed: i) a crosscountry comparison of firms across the selection of comparator countries; ii) an analysis of the panel of Malagasy firms through time using the two rounds of the Madagascar survey; and iii) an analysis of Malagasy micro and informal firms, using data from two additional surveys. These analyses are all intended to highlight structural factors that may also be relevant to understanding firm performance in the future, once the current political crisis is resolved. The analysis focuses on firm employment and labor productivity, both important indicators of firm performance, and on the policy objectives of increasing formal employment opportunities and improving international competitiveness. The two outcome indicators are analyzed in terms of various additional firm characteristics in order to highlight any strong correlations that may have policy implications for promoting enterprise development. There is a wide literature examining firm growth dynamics and performance, and a number of empirical regularities have emerged. Principal among these is the inverse relationship between firm size and growth rates, and also between firm age and growth rates. This is thought to relate to productivity, with firms growing as they move towards their optimal level of productivity, and ceasing to grow as they get older and closer to their optimal productivity level, a process modeled in its simplest form by Jovanovic (1989). However, the majority of these studies focus on developed economies.12 It is not evident that the same relationship holds for developing economies, where the economic environment may encourage small firms to remain small, with growth stemming from the expansion of already large firms. Similarly, it is not clear what factors are associated with greater productivity levels in developing countries, where the supporting infrastructures for private companies are often lacking. Factors that may affect these relationships in developing countries, but less so in developed countries, include a more limited size of markets, higher degrees of idiosyncratic firm-level risk, poor infrastructure, relatively high transactions costs, bureaucratic costs of formalization, and corruption. Some common firm characteristics which appear to be associated with firm performance include the firms size and age, as well as manager education (see McPherson, 1996 and Collier and Gunning, 1999, for example) although the relationship between size, age, and growth is found to be more ambiguous than for developed economies. Indeed, developing country firms may face certain growth threshold effects, with firms below a certain size either unable or unwilling to expand beyond a certain size, implying that employment growth stems from already larger firms. This may be due to market failures
12

The most well known are based on the US and UK: Mansfield (1967), Hall (1987), Evans (1987), Dunne, Roberts and Samuelson (1988), and Dunne and Hughes (1994). These studies find that due to competition effects and market selection, firm growth rates and exit probabilities are negatively related to firm size and age.

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such as lack of access to credit or a sharply increasing tax burden, and may additionally relate to market failures such as high entry costs, which act as a barrier to exitmeaning low productivity firms do not exit, which would be in line with the Jovanovic model and low growth rates for older firms. The outcomes of the three analyses presented here lead to the following findings. Most firm growth in employment terms comes from medium and large firms rather than micro and small firms, as predicted in developed country studies. In common with some other developing countries, where firms are reluctant to expand beyond a certain visible size, as documented by Tybout (2000), this may indicate the presence of barriers to firm expansion from the smallest levelsreducing the potential role SMEs to to expand and provide employment generation. Higher firm growth rates are positively associated with single proprietorships and firms that import, while counter-intuitively, growth rates are negatively associated with having a university-educated manager and the number of skilled employees. However, this does not hold in the Malagasy case, where no clear relationship is established. This may be because less skills-based firms employ larger numbers of employees who are also unskilled, thus expanding and maintaining their low-skill share. In terms of labor productivity, the regression coefficients are more in line with expectations, although again there is an apparent inverted-U relationship between firm performance and firm size, with firm productivity increasing up to a certain large size before stagnating or declining. Capital intensity is strongly associated with labor productivity, and public and private limited companies are also found to be positively associated with higher productivity. Holding a foreign production license and exporting are also strongly associated with higher labor productivity, although neither is associated with firm growth. A graphic analysis of firm productivity suggests high levels of heterogeneity across and within countries, as is the case for sectors. This is perhaps not unexpected given the range of business conditions faced in different sectors and across countries, but is nonetheless important to highlight given the implications this has for growth. Focusing only on Malagasy firms, the small remaining sample suggests some of the same characteristics found across comparator countries, with indications of a weak inverted-U relationship between size and productivity, and capital intensity standing out as the principal correlated factor along with having a university educated manager. That is, having a university educated manager is correlated with relatively higher productivity levels and productivity growth. Turning to micro and informal sector firms, the analysis once again suggests the presence of an invertedU relation between size and productivity, although at a vastly smaller scale to the prior analysis. Perhaps most importantly, formality for these micro firms is found to be negatively associated with productivity, suggesting there is a negative premium to formality. This is plausible given the substantial burden to very small firms of complying with government regulations. Implicitly, this also suggests that many micro firms operate informally in order to maximize their productivity, something which may again lead to threshold effects in the firm growth path. The following sections provide further details on these analyses. 20 | P a g e

Firm Performance in a Cross-Country Perspective

The first section presents descriptive indicators of firm performance across countries; and then uses regression analysis to identify which firm characteristics correlate with firm performance. Characteristics of Sample Firms Table 2. presents the median figures for a number of firm-level indicators across the comparator countries.13 As shown in column (1), the median firm size varies considerably by country, from only seven workers in Cte dIvoire to 120 in Vietnam. While this may reflect differences in the industrial structure and size distribution within each country, it surely also reflects the samples employed for each country, something to be controlled for in comparing across countries. For Madagascar, the data for 2004 and 2007 indicate that the median sample firm decreased in size from 38 workers to 25 workers between the two surveys, likely due to a mix of the change in sample and an actual reduction in firm sizes of the underlining sampling universe.
Table 2.1: Median Firm Performance Measures for Comparator Countries
(1) (2) Annual employment growth rate (%) 0.0 0.0 6.8 4.0 0.0 0.6 9.9 6.1 7.3 7.4 (3) VA per worker (US$) 4,413.9 7,850.1 19,456.1 3,375.9 5,128.5 29,981.4 13,301.9 10,323.3 33,020.2 12,732.9 6,434.4 (4) Average wage (US$) 1,650.1 2,200.4 4,576.2 1,631.3 2,209.4 10,157.8 6,090.2 2,156.3 12,189.7 2,426.5 2,361.7 (5) Unit labor costs (share of VA) 0.3 0.3 0.3 0.1 0.4 0.3 0.4 0.3 0.5 0.3 0.4 (6) Capital intensity (US$) 458.4 7,934.2 24,907.3 1,266.0 4,430.8 34,557.5 9,660.5 4,613.0 14,964.5 5,311.7 5,668.1 (7) VA per unit of capital (US$) 2.4 1.1 0.9 2.6 1.0 1.1 1.3 1.5 2.1 1.8 0.8

Country Cote d'Ivoire India Kenya Madagascar2004 Madagascar2007 Malaysia Mauritius Rwanda South Africa Tanzania Uganda

No. of workers 7 20 37 38 25 55 50 11 26 15 12

Vietnam 120 3.5 6,951.5 2,969.3 0.4 8,686.1 0.8 Note: US$ Figures in 2005 US US$ adjusted per PPP. Firm growth calculated on the basis of employment as follows:
= ln ln 3 .

Column (2) indicates the median firm employment growth rates for each country over the three years prior to each survey, defined as
=
ln
+3

ln

. The highest median firm growth rates for

the sample countries are found in Rwanda (9.9 percent), Uganda (7.4 percent), Tanzania (7.3 percent), and Kenya (6.8 percent), all of which are members of the East African Community (EAC) trade bloc. Rwanda, Tanzania, and Kenya are also among the top five comparison countries in terms of GDP growth per capita over the period 2000-2008. The median Malagasy firm grew at a considerably lower 4.0 percent up to 2004. While this may reflect a rebound effect after the political crisis in 2002, the median

13

The focus here is on median statistics rather than the mean, given the undesirable influence of outliers on the latter.

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Malagasy firm displays zero growth over the three years to 2007, potentially an impact of political uncertainty on firm expansionary behavior during that period.
Box 2.1: Stochastic Frontier AnalysisAn Alternative Measure of Firm Performance In addition to the above regression analysis, stochastic frontier analysis can provide further insights into firm performance. This uses a regression to establish a productivity frontier for each firm, with the productivity of a firm hypothesized to be a function of a set of inputs, inefficiency, and random error. An efficiency score can then be estimated as the ratio of observed productivity to the estimated maximum feasible productivity. The equation estimated is of the following form, where in this case is labor productivity, are the firm specific characteristics similar to those used in the above regressions, is the normally distributed error component, and is the non-negative technical inefficiency component. ln = + ln +

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plots estimated technical efficiency scores against value added per worker by firm size (left-hand graph) and export status (right-hand graph). The first suggests a positive linear relationship between value added per worker and technical efficiency with little distinction according to firm size. That is, whether a firm is large or small, its efficiency score is similarly related to its level of labor productivity, implying that our labor productivity measure is a good proxy for firm productivity. In a similar graphing exercise according to exporting and non-exporting firms, the results are similar, implying little difference in the relationship between efficiency and value added per worker.
Figure 2.1: Technical Efficiency Score vs. Value Added per Worker by Size and Export Status
.9922
.9922

Efficiency Score .9918 .992

.9916

10

15 Value Added per Worker

20

25 Large SME

.9916 5

Efficiency Score .9918 .992

10

15 Value Added per Worker

20

25 Exporter Non-Exporter

Source: Enterprise Survey and Authors Calculations

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Labor productivity, as measured by value added per worker, varies considerably across the sample of countries, with the median level for each country ranging from a low of US$3,375.9 for Madagascar in 2004 to US$33,020.2 for South Africa.14 Madagascar 2007 also has notably low productivity in comparison to the other countries, with median productivity only above that of Cte dIvoire; this is examined further below. The current crisis is more likely to have further lowered this median level than to have raised it, potentially further lowering Malagasy capacity to compete on international markets. Productivity levels are clearly related to capital intensity. Column (6) in Table 2.1 shows Madagascar in 2004 having the lowest level of capital intensity per worker (US$1,266) among comparator countries after Cte dIvoire (US$458), and the third lowest level of capital intensity in 2007 (US$4,430). Nonetheless, Madagascars 2007 median level is considerably above that found in 2004, implying a considerable increase in capital intensity if the samples are to be compared. Despite this, capital intensity in Madagascar, Cte dIvoire, Rwanda (US$4,613.0), as well as Tanzania (US$5,311.7) and Uganda (US$5,668.1) is well below that of the more recognized success stories of Mauritius (US$9,660.5) and Vietnam (US$8,686.1), not to mention South Africa (US$14,964.5) and Kenya, which has a surprising capital intensity per worker (US$24,907.3). Nonetheless, the value added per unit of capital is relatively high for Madagascar in 2004 (2.6), though at a similar level to comparator countries in 2007 (1.0). Such variations in capital intensity across countries may reflect variations across sectors and the sectoral composition of the economies, something which is controlled for in the regression analysis below. Presumably as a reflection of the low labor productivity, the average wage in Madagascar is also low in comparison to other countries. Madagascar in 2004 has the lowest wage, at US$1,631 per annum, closely followed by Madagascar in 2007, with US$2,209.4. While low wages are potentially attractive for investors, particularly in basic manufacturing such as garments, low productivity greatly offsets that cost advantage. For example, Madagascar in 2007 had one of the highest unit labor costs of the comparison countries at 0.4, below only South Africa, and tied with Mauritius, Uganda, and Vietnam. Given the apparently large variation in firm sizes sampled across the comparator countries, it is useful to look at the same indicators across firms from different size categories. Aggregating across all countries and categorizing firms according to size (micro and small, up to 19 workers; medium, 20 to 99 workers; and large, 100 workers or more), Table 2. shows that whereas the median micro/small firm did not grow in the three years prior to the survey, those in the medium and large brackets grew by 3.4 and 3.2 percent, respectively.15 Although medians hide the range in growth rates, it is nonetheless prima facie evidence that firm size and growth rates may not follow the negative relationship found in developed economies, as discussed in Mansfield (1967), Hall (1987), Evans (1987), Dunne, Roberts and Samuelson (1988), and Dunne and Hughes (1994), as mentioned above. This further suggests the existence of circumstances that

14 15

All values are based on 2005 purchasing price parity (ppp) adjusted US dollars. Note that the aggregation of the micro (<5 workers) and small firms (5-19) is due to the small number of micro firms captured in this dataset.

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discourage the median micro/small firm from growing across these countries, perhaps relating to the regulatory or market environment. These issues are examined below and in the subsequent chapter.
Table 2.2: Median Firm Performance Indicators by Size Category for all Comparator Countries
(1) (2) Annual firm growth rate (%) 0.0 3.5 (3) (4) (5) (6) (7) VA per unit of capital (US$) 1.0 1.2

Size Micro & small Medium

No. of workers 10.0 40.0

VA per worker (US$) 7,834.0 12,099.1

Average wage (US$) 2,475.1 3,741.8

Unit labor costs (share of VA) 0.3 0.3

Capital intensity (US$) 8,398.5 9,716.2

Large 240.0 3.2 15,283.5 4,124.1 0.3 11,715.6 1.3 Note: Micro and small refers to firms with up to 19 workers; Medium with 20-99 workers, and Large with 100+. Figures in 2005 US$ adjusted per PPP.

In addition to displaying higher growth rates, the median medium and large firms have considerably higher labor productivity than micro and small firms, with large firms displaying almost double the level of value-added per worker (US$15,283.5) of micro and small firms (US$7,834). Medium firms are also considerably more productive (US$12,099.1) than smaller firms on this measure. This is, again, likely to relate to capital intensity, which, as shown in column (6), increases with firm size.16 As will be seen in the section examining survey data from micro and informal firms, the median capital intensity of micro and small firms captured here is still relatively high, at US$8,398.5 per worker, though this is likely to vary considerably across firms with different characteristics within that size category. Like labor productivity, the average wage also appears to increase with size of the median firm in each size category, although unit labor costs remain the same. The aggregate figures presented in Table 2. and Table 2. may mask performance differences across sectors. As shown in The highest median average firm wages are also in the chemicals sector, followed by machinery and equipment manufacturing, while the lowest wage is in the wholesale trade sector. Clearly there is less variation in these median indicators across sectors than across size categories and countries, implying that most variation stems from firm size and country.

Table 2., the median firm size varies by sector, but to a lesser degree than was seen across countries. Median firm growth rates are also relatively closely matched, with the highest growth rates in Other Services (5.1 percent) and Construction (4.2 percent), and the lowest in Machinery and Equipment (1.6 percent).17 Labor productivity varies considerably, from US$7,193.6 in the garments sector to US$20,578.7 in the chemicals sector, while capital intensity ranges from US$3,437 in Other Services and US$5,514 in Garments, to US$13,065 in the chemicals sector.

16 17

This is based on the median firm in each size category. The apparent stagnant firm growth in wholesale and transportation relates to a lack of data for those sectors.

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The highest median average firm wages are also in the chemicals sector, followed by machinery and equipment manufacturing, while the lowest wage is in the wholesale trade sector. Clearly there is less variation in these median indicators across sectors than across size categories and countries, implying that most variation stems from firm size and country.

Table 2.3: Median Firm Performance Indicators by Sector Annual Firm growth rate (%) 3.5 3.4 3.5 1.6 2.1 2.4 3.5 1.7 3.4 0.0 4.2 5.1 0.0 2.3 Unit labor costs (share of VA) 0.3 0.4 0.4 0.3 0.3 0.3 0.4 0.3 0.3 0.3 0.4 VA per unit of capital (US$) 0.9 1.5 1.0 1.1 1.3 0.9 0.8 1.1 15.8 0.0 0.0 4.2 0.0 1.3

Sector Food Garments Textiles Machinery & equipment Chemicals Plastics & rubber Fabricated metal products Other manufacturing Retail Wholesale Construction Other services Transportation Unknown

No. of workers 34.0 46.0 40.0 26.3 53.0 61.0 50.0 22.0 8.0 24.0 40.5 11.0 36.6 33.7

VA per worker (US$) 11,350.3 7,193.6 8,792.9 12,704.1 20,578.7 9,442.9 7,792.5 11,000.0 7,017.4 9,019.1 13,301.9

Average wages (US$) 3,340.7 3,033.2 3,197.2 4,146.4 4,943.7 3,351.9 3,047.1 3,268.5 2,948.9 2,629.6 3,031.9 2,164.1 3,454.4 2,881.9

Capital intensity (US$) 11,846.9 5,514.6 8,808.9 12,832.5 13,064.9 12,085.3 11,030.6 9,643.4 9,109.7 0.0 0.0 3,437.6 0.0 9,440.0

Note: Figures in 2005 US$ adjusted per PPP.

Table 2. presents the same performance indicators by whether or not the firm is multi-plant, the manager is university educated, the firm is an exporter, whether or not it has foreign participation, and its legal status.
Being part of a multi-plant firm might be expected to indicate a firms greater efficiency through specialization of tasks, specialization of tasks, access to additional services, and perhaps credit from other parts of the company. Indeed, according company. Indeed, according to the median data presented in

Table 2. the median multi-plant firm is larger and its labor productivity is almost double that of the single-plant firm. The average wage within the median multi-plant firm is also more than 50 percent higher than in the single-plant firm. This suggests that multi-plant firms are quite different from singleplant firms, potentially due to their expansion into other productive sectors. Having a university educated manager is associated with larger firms and higher labor productivity, although here the difference is not large and will be subject to more rigorous analysis below. Exporting is commonly related to higher productivity. Whether or not this is a consequence of more productive firms starting to export or through learning from exporting (or both) cannot be answered 26 | P a g e

using the available information. In the present sample of firms across countries, the median exporting firm is considerably larger than the non-exporter, has more than a 50 percent higher employment growth rate, and is almost twice as productive. The exporting firm also pays considerably higher wages as a result (US$4,463.4 compared with US$2,856.3 for non-exporters), and is almost 50 percent more capital intensive. This suggests that exporting firms are a sub-sector apart.

Table 2.4: Median Firm Performance by Other Characteristics

No. of Workers Multi-plant firm Uni. Educ. Manager Exporter Foreign Owner. Share No Yes No Yes No Yes No Yes Public Ltd Co. Private Ltd Co. Legal Status Sole Proprietorship Partnership Ltd Partnership Other Legal Status Note: $ Figures in 2005 US $ adjusted per PPP 24.0 61.0 7.5 16.0 18.0 100.0 10.0 25.7 220.0 50.3 12.0 16.3 20.0 55.0

Annual Firm Growth Rate (%) 2.5 3.0 0.0 0.0 2.0 3.2 0.0 0.0 1.5 3.2 3.5 0.0 6.6 3.0

VA per worker ($) 9,509.2 18,674.7 12,293.6 14,683.2 8,916.0 15,445.5 9,761.3 20,483.1 25,479.7 17,081.0 7,192.2 6,820.7 20,626.7 6,206.1

Average Wage ($) 3,072.6 4,988.2 1,478.3 1,683.2 2,856.3 4,463.4 1,554.0 2,317.6 5,584.2 4,856.2 2,134.5 2,367.3 9,246.2 2,847.3

Unit Labor Costs (share of VA) 0.3 0.3 0.2 0.1 0.3 0.3 0.2 0.2 0.2 0.3 0.3 0.3 0.5 0.5

Capital Intensity ($) 3,147.9 4,001.5 1,496.4 4,125.3 8,417.0 12,790.4 3,266.0 3,477.5 25,657.4 14,797.7 5,379.0 7,863.6 12,096.3 7,860.1

VA per Unit of Capital ($) 0.5 0.6 0.5 0.6 1.1 1.3 0.5 0.5 0.6 0.5 0.6 0.5 0.7 0.3

Foreign ownership participation (no matter how large) is positively associated with larger firms, and with more than double the level of labor productivity in purely domestic firms, with a median wage which is higher even than exporting firms. Clearly there is likely to be some overlap in categories here, particularly between export status and foreign participation. Finally, legal status bears some relation to the presented firm performance indicators. Laeven and Woodruff (2007) bibl find evidence from Mexico that firm size and ownership form vary with the degree of legal protection afforded, such that states with more effective legal systems have a larger share of large firms. They find that the impact of an improvement in legal quality is felt most in sectors with more single proprietorships, indicating that the legal environment can affect the idiosyncratic risk faced by firms according to their legal form. According to the sample here, limited liability firms are considerably larger than sole proprietorships and partnerships (and firms of other legal forms), as might be expected, as well as being considerably more capital intensive and productive, although the small number of Limited Partnerships in the sample (188 out of more than 8000 firms) appear to have a high level of value-added and to offer the highest level of wages. On that basis, it will be of interest to investigate the role of legal form in firm performance.

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Prior to investigating relationships between firm characteristics and performance, Figure 2. plots employment growth against labor productivity, separated according to firm size and with axes at the median values. This does not reveal any striking patterns, except that productivity varies considerably for firms with the same employment growth rate, and perhaps that higher growth appears to be more associated with large firms than SMEs. The lack of any discernible pattern suggests that growth does not necessarily occur in the most productive firms, and that unproductive firms can also have high growth rates. Not only this, but unproductive firms do not exit, thereby implying the misallocation of resources across these economies. The reasons for this misallocation of resources are likely to relate to a number of business environment characteristics, investigated in the following chapter.

Figure 2.2: Firm Growth Rates vs. Labor Productivity

200 -300 -10 Employment Growth -200 -100 0 100

-5 0 5 Normalised Log Value Added per Worker

10 Large SME

Cross-Country Regression Analysis The broad associations described above can be examined more closely with cross-country regression analysis. Although this does not allow conclusions to be drawn regarding the direction of causality between different firm characteristics and performance, it nonetheless provides useful insights into the nature of the relationships between the principal important variables. Firm Growth Firm growth is modeled estimating an equation of the following form and using Ordinary Least Squares: = + 28 | P a g e

includes a number of firm and owner characteristics as well as country and sector control where dummy variables. Growth here is defined as the annualized employment growth rate over the three years prior to the survey: = ln ln 3 .

Table 2. presents the estimated coefficients using four different specifications that include increasing levels of detail (with a consequent declining sample size, from 4,256 to 3,603 to 2,890 to 1,610 firms). The specification includes squared terms for the (log) of employment, to allow for the possibility of nonlinear relationships between size and firm growth. Firm size and age are in logarithmic form to reduce the impact of a small number of very old (maximum age 141 years) and very large (maximum number of employees 20,780) firms on the results.
Table 2.5: Cross-Country Employment Growth Regression Coefficients
(1) 3.698 [0.706]*** -0.269 [0.078]*** -3.123 [0.264]*** -0.475 [0.127]*** -0.016 [0.008]* -4.377 [1.380]*** -2.544 [0.635]*** -1.592 [0.664]** -1.538 [1.521] -1.516 [1.039] -0.453 [0.573] 2.081 [0.712]*** 1.580 [0.859]* 1.959 [0.846]** 1.539 [0.871]* 3.692 [1.602]** -0.492 [1.248] 0.947 [0.618] (2) 4.922 [0.765]*** -0.379 [0.084]*** -3.077 [0.286]*** -0.604 [0.144]*** -0.015 [0.009] -5.089 [1.464]*** -2.884 [0.698]*** -1.696 [0.703]** -6.828 [2.594]*** -1.743 [1.090] -0.471 [0.648] 2.107 [0.773]*** 1.528 [0.882]* 2.263 [0.902]** 1.482 [0.982] 3.669 [1.658]** -0.491 [1.270] 0.865 [0.690] (3) 4.906 [1.122]*** -0.391 [0.107]*** -2.897 [0.366]*** -0.578 [0.191]*** -0.025 [0.014]* -5.130 [2.130]** -2.287 [0.816]*** -1.364 [0.788]* -1.818 [2.541] -1.293 [1.276] -0.808 [0.825] 3.248 [1.002]*** 1.184 [1.069] 2.775 [0.842]*** 0.889 [1.317] 3.265 [2.297] -0.319 [1.350] 0.918 [0.756] (4) 6.491 [1.745]*** -0.577 [0.168]*** -2.410 [0.430]*** -0.458 [0.250]* -0.021 [0.011]* -3.747 [2.354] -2.753 [0.762]*** 0.190 [0.748] -7.329 [4.378]* 1.905 [4.141] 0.654 [0.852] 2.344 [1.051]** -0.262 [1.384] 1.398 [1.068] 0.794 [1.575] -4.347 [2.977] -1.615 [3.680] 0.858 [0.738]

ln(Employees) ln(Empl)^2 ln(Firm Age) ln(Capital per empl.) Foreign Ownership (d) Public Ltd Co. (d) Private Ltd Co. (d) Partnership (d) Ltd Partnership (d) Other Legal Form (d) Multi-plant Firm (d) Garments (d) Textiles (d) Mechinery & Equipment (d) Chemicals (d) Plastics & Rubber (d) Fabircated Metal Products (d) OtherMan_d

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Retail Trade (d) Wholesale Trade (d) Construction (d) Other Services (d) Transport (d) Madagascar 2004 (d) Madagascar 2007 (d) Kenya (d) Tanzania (d) Rwanda (d) Uganda (d) India (d) Cote d'Ivoire (d) South Africa (d) Mauritius (d) Vietnam (d) Skilled Employee Share Exporter (d) Importer (d) Univerity Edu. Manager (d) N Pesudo R2 F P>F

-10.342 [9.709] 0.000 [0.000] 0.000 [0.000] -11.857 [13.656] 0.000 [0.000] -7.335 [2.554]*** -9.454 [2.484]*** 0.822 [2.304] -1.613 [2.373] 0.000 [0.000] 0.009 [2.355] -5.393 [2.225]** -3.913 [2.620] -0.150 [2.264] -5.405 [2.651]** -6.305 [2.266]***

-10.176 [9.728] 0.000 [0.000] 0.000 [0.000] -11.927 [13.681] 0.000 [0.000] -6.915 [2.580]*** -9.330 [2.493]*** 1.120 [2.312] -1.078 [2.380] 0.000 [0.000] 0.326 [2.361] -4.887 [2.234]** -3.206 [2.645] 0.000 [0.000] -4.893 [2.761]* -6.265 [2.277]*** -0.017 [0.009]*

-5.395 [2.284]** 0.000 [0.000] 0.000 [0.000] -12.787 [2.416]*** 0.000 [0.000] -6.382 [2.462]*** -9.212 [2.079]*** 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.878 [2.216] -3.835 [2.167]* -2.355 [2.921] 0.000 [0.000] 0.000 [0.000] -5.424 [2.254]** -0.023 [0.011]** -0.600 [0.741] 2.161 [0.803]***

-11.052 [3.564]*** 0.000 [0.000] 0.000 [0.000] -11.419 [2.630]*** 0.000 [0.000] -6.664 [2.619]** -8.285 [2.095]*** 0.000 [0.000] -1.150 [2.208] 0.000 [0.000] 0.276 [2.225] -5.626 [2.161]*** -2.061 [3.010] 0.000 [0.000] -4.892 [2.750]* 0.000 [0.000] -0.034 [0.014]**

4256.000 0.080 12.228 0.000

3603.000 0.087 11.340 0.000 661

2890.000 0.084 . . 530

-1.600 [0.694]** 1610.000 0.129 . . 277

Turning Point (empl) 966 *** p<0.01, ** p<0.05, * p<0.1 Robust standard errors in brackets

In all four specifications in Table 2.5, there is a non-linear relationship found between firm size and firm growth rate, growth rate, indicated by the positive coefficient on firm size and the negative coefficient on the square of firm size, of firm size, determined at the one percent level of statistical significance. This suggests that firm growth rates are positively rates are positively correlated with firm size up to a specific size (966, 661, 530 and 277 workers under the four the four specifications, respectively), but negatively correlated with any further firm expansion. Although there is

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Although there is considerable variation among the four specifications, there is little doubt that the turning point refers to large firms, therefore implying that the most dynamism across the sample of countries comes from medium to large firms firms, and not micro firms This is further illustrated in firms.

Figure 2. which shows the fitted growth rates associated with firm size as determined by the three specifications two to four, highlighting that higher growth rates are associated with larger firms and that , growth rates decline very little for large firms beyond the turning point ne point.

Figure 2.3: Fitted Firm Growth Rate vs. Firm Size 10

Employment Growth Rate

8 6 4 2 0 -2 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700

Spec.2

Firm Size (employees) Spec.3 Spec.4

More in line with the standard results, growth rates are negatively associated with firm age across all three specifications, implying that older firms tend to grow more slowly if at all; and that growth is also slowly, ; negatively correlated with capital intensity. This makes sense in as much as we are discussing employment growth and thus to some extent, labor intensity intensitymore labor-intensive industries are intensive industri associated with higher employment growth rates. A foreign ownership share is not strongly correlated with firm growth, although under specifications (1), (1 (3), and (4) it is weakly determined as being negatively correlated, lowering growth rates by around 2 percentage points on average and ceteris paribus. While perhaps unexpected, this may reflect that . foreign ownership forms often start off large with implicitly lower growth rates, or it may reflect the process of privatization of state-owned enterprises and their subsequent downsizing, as is common to owned enterprises downsizing many developing and transition economies.

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Also in terms of ownership, public and private limited companies, partnerships, and private partnerships are all negatively correlated with growth in comparison to sole proprietorships, the comparison group. This implies that sole proprietorships are associated with higher growth rates once size and the other control variables are taken into account, a surprising result given the greater exposure to risk of operating in this manner.18 Whether or not the firm is part of a multi-plant firm is included in the analysis, given the apparent effects highlighted above. However it is not found to have any association with firm growth rates. The share of skilled employees is negatively correlated with firm growth, also an unexpected result. This may be because in a skill-scarce economy, large firms are more likely to be intensive in unskilled than skilled labor, implying that larger shares of skilled workers are more likely to arise in small firms which, as has been established, present lower growth rates across the sample of comparison countries. In terms of the additional variables reported in (3) and (4), according to the regression results growth is not associated with exports; however, importing inputs is associated with higher growth rates. Interestingly, imports can be an important source of productivity growth, a point emphasized by Amiti and Konings (2007), which for some firms may translate to higher growth. Finally, according to the estimated results, a university-educated manager is negatively associated with firm growth, again a counter-intuitive result, although this may relate to skilled managers leading skillintensive firms, which are more likely to grow slowly, as discussed above. Again, this may result in other firm characteristics not being picked up in this regression, but what is important for firm performance is actually productivity levels. In terms of countries, the estimated coefficients reveal that Malagasy firms in 2007 have the lowest growth rates, closely followed by Madagascar 2004, on average and ceteris paribus, the coefficients referring to the excluded base case, Malaysia. In sectoral terms, across countries, all except the retail trade and other services have higher growth rates than the food processing sector. In summary, in contrast to developed economy results, firm growth rates are associated more with large firms than micro or small firms, older firms have lower growth rates, sole proprietorships are associated with higher growth rates, as are imported inputs. The skill share and having a university-educated manager emerge as being negatively correlated with firm growth rates. These unusual results may relate to characteristics of the operating environment through an unwillingness to grow on the part of small firms, in an attempt to stay hidden from a predatory bureaucracy or crime, or inability to grow due to constraints on access to capital or access to infrastructures, etc. These issues are investigated further below. Labor Productivity

The mean size for a sole proprietorship is 34.5 workers, compared with 737 for a public limited company, 159 for a private limited company, 108 for a partnership, 194 for a limited partnership, and 364 for other legal forms.

18

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Table 2. presents a similar OLS regression to above, with labor productivity as a dependent variable and four specifications, again with a decreasing sample size. = +

Once again, the correlation between the dependent variable and firm size appears as non-linear, implying that firm relation implying that firm productivity increases with firm size up to a certain size ( (132, 120, 56, and 76 workers according to the according to the four specifications, respectively), before declining. This relationship is illustrated in his

Figure 2.. Again, this implies increasing labor productivity with firm size up to a fairly large scale.

Figure 2.4: Fitted Labor Productivity (Median = 0) vs. Firm Size 4: 0.8

Normalised Productivity Levels

0.6 0.4 0.2 0 -0.2 -0.4 0 50 100 150 200 250 300 350 400 450 500

Spec.1

Firm Size (employees) Spec.2 Spec.3

Spec.4

Consistent with the Jovanovic (1989) model briefly mentioned above, firm age is positively associated model, with labor productivity, potentially due to firms consistently improving at their task as they gain more operating experience.

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Capital intensity is also positively associated with labor productivity across all countries, as would be expected, as is a share of foreign ownership, although this latter factor has only a small impact on productivity relative to other factors. Contrary to the results regarding firm growth rates, public and private limited companies are found to be positively correlated with productivity, implying that public limited companies in particular are considerably more productive than sole proprietorships, while partnerships and other legal forms are not found to have statistically significant effects relative to sole proprietorships, even controlling for firm size. This may then suggest differences in the operating environment which impacts on labor productivity for firms of different legal forms, potentially due to the more limited exposure to firm-level risk of limited liability companies. Another possible explanation could be differences in managerial practices; in fact some recent studies point towards the importance of managerial characteristics as key determinant of firm performance.19

Table 2.6: Cross-Country Labor Productivity Regression Coefficients

(1) 0.342 [0.073]*** -0.035 [0.008]*** 0.110 [0.024]*** 0.348 [0.014]*** 0.005 [0.001]*** 0.397 [0.134]*** 0.215 [0.067]*** -0.020 [0.066] -0.101 [0.236] -0.051 [0.118] 0.161 [0.063]** -0.812 [1.106] -1.139 [1.107] -1.224 [1.107] -1.550 (2) 0.335 [0.084]*** -0.035 [0.009]*** 0.096 [0.026]*** 0.345 [0.031]*** 0.004 [0.001]*** 0.312 [0.178]* 0.245 [0.072]*** 0.022 [0.063] -0.077 [0.226] 0.031 [0.120] 0.155 [0.083]* -0.709 [0.164]*** -1.057 [0.182]*** -1.034 [0.175]*** -1.389 (3) 0.403 [0.089]*** -0.050 [0.011]*** 0.103 [0.030]*** 0.332 [0.016]*** 0.004 [0.001]*** 0.480 [0.149]*** 0.312 [0.076]*** -0.093 [0.074] -0.171 [0.261] 0.854 [0.331]** 0.226 [0.073]*** -0.870 [1.143] -1.188 [1.144] -1.404 [1.144] -1.706 (4) 0.459 [0.147]*** -0.053 [0.017]*** 0.150 [0.041]*** 0.345 [0.036]*** 0.004 [0.001]*** 0.512 [0.218]** 0.264 [0.103]** -0.149 [0.090]* -0.153 [0.491] 0.870 [0.568] 0.177 [0.108] -0.480 [0.183]*** -0.901 [0.229]*** -1.006 [0.205]*** -1.390

ln(Employees) ln(Empl)^2 ln(Firm Age) ln(Capital per empl.) Foreign Ownership (d) Public Ltd Co. (d) Private Ltd Co. (d) Partnership (d) Ltd Partnership (d) Other Legal Form (d) Multi-plant Firm (d) Garments (d) Textiles (d) Mechinery & Equipment (d) Chemicals (d)
19

Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," Quarterly Journal of Economics, MIT Press, Vol. 122(4), pp. 1351-1408 (November).

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Plastics & Rubber (d) Fabircated Metal Products (d) OtherMan_d Retail Trade (d) Wholesale Trade (d) Construction (d) Other Services (d) Transport (d) Madagascar 2004 (d) Madagascar 2007 (d) Kenya (d) Tanzania (d) Rwanda (d) Uganda (d) India (d) Cote d'Ivoire (d) South Africa (d) Mauritius (d) Vietnam (d) Skilled Employee Share Exporter (d) Importer (d) Foreign Licence Holder (d) Univerity Edu. Manager (d) Observations R-squared Prob > F F test

[1.107] -0.862 [1.111] -0.952 [1.109] -1.393 [1.106] -0.323 [1.552] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.516 [0.185]*** -0.940 [0.175]*** -0.043 [0.163] 0.202 [0.172] -0.007 [0.239] -0.478 [0.174]*** -0.228 [0.149] -0.217 [0.197] 0.000 [0.000] -0.021 [0.232] -0.645 [0.155]*** 0.003 [0.001]***

[0.188]*** -0.733 [0.192]*** -0.769 [0.192]*** -1.155 [0.172]*** 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.036 [0.115] 0.000 [0.000] 0.616 [0.218]*** -0.877 [0.199]*** 0.000 [0.000] 0.000 [0.000] 0.048 [0.257] -0.376 [0.197]* 0.009 [0.164] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] -0.510 [0.179]*** 0.003 [0.001]** 0.298 [0.061]*** 0.257 [0.066]***

[1.145] -0.987 [1.170] -1.143 [1.153] -1.528 [1.143] -0.327 [1.601] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.532 [0.243]** -0.975 [0.234]*** -0.066 [0.224] 0.139 [0.226] 0.000 [0.000] -0.512 [0.229]** -0.170 [0.208] -0.351 [0.252] 0.000 [0.000] -0.135 [0.280] 0.000 [0.000] 0.003 [0.001]***

[0.219]*** -0.598 [0.444] -1.168 [0.305]*** -1.145 [0.197]*** 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.423 [0.129]*** 0.000 [0.000] 0.413 [0.240]* -1.012 [0.221]*** 0.000 [0.000] 0.168 [0.207] -0.074 [0.268] -0.499 [0.204]** -0.383 [0.203]* -0.252 [0.261] 0.000 [0.000] -0.066 [0.265] 0.000 [0.000] 0.002 [0.002]

0.422 [0.101]*** 0.203 [0.092]** 1215.000 0.355 . . 76

2537.000 0.319 39.097 0.000

2075.000 0.307 . . 120

1921.000 0.331 32.237 0.000 56

Turning Point 132 *** p<0.01, ** p<0.05, * p<0.1

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Robust standard errors in brackets

Multi-plant firms are found to be associated with higher productivity than single plant firms, as appeared to be the case from the descriptive statistics, and this is also the case for the share of skilled labor.
Of the additional variables introduced in specifications (2), (3), and (4), the greatest impact on productivity appears to come productivity appears to come from holding a foreign production license, followed by exporting, importing, and having a importing, and having a university-educated manager. This is in contrast with the growth regression, where exporting was where exporting was found to bear no relation to firm growth and an educated manager to have a negative association. This negative association. This would suggest a disconnect between productivity and firm growth consistent with the descriptive with the descriptive results from

Figure 2., where we showed the absence of any clear pattern between firm productivity and growth. Such disconnect could be a consequence of market distortions leading to inefficient resources reallocation.
In sectoral terms, across countries, and controlling for all other variables presented in

Table 2., the highest levels of productivity appear to be in the garments sector (statistically significant only under (3)), followed by the food processing sector, the control category. This may reflect the effect of high levels of global competition in these sectors.

Understanding Firm Heterogeneity An important dimension to understanding private sector development in Madagascar is the degree of heterogeneity among firms in the same sector, particularly in terms of productivity. Figure 2. presents kernel density curves for the log of value added per worker for the comparator countries, across all sectors and standardized to the sector median across all countries. Although not possible to put all countries on one graph, the three graphs provide a snapshot of the different degrees of dispersion of the labor productivity distribution across firms within each country, and comparisons between the shapes of the distribution between countries.
Figure 2.5: Labor Productivity Dispersion Within and Between Countries

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Kernel Density of Labor Productivity

.5

Kernel Density of Labor Productivity

.5 0 -10 .1 Density .2 .3 .4

.1

Density .2 .3

.4

-10

-5 0 5 (Normalized Value-added per worker) Cote d'Ivoire India Kenya

10 Vietnam

-5 0 (Normalized Value-added per worker) Madagascar 04 Madagascar 07 Malaysia

5 Uganda

kernel = epanechnikov, bandwidth = 0.5403

kernel = epanechnikov, bandwidth = 0.3578

Kernel Density of Labor Productivity

.4 0 -4 .1 Density .2 .3

-2 Rwanda

0 2 (Normalized Value-added per worker) Tanzania South Africa

6 Mauritius

kernel = epanechnikov, bandwidth = 0.3591

In the first segment of Figure 2., Cote dIvoire clearly shows a mean productivity considerably below that of all the other countries while the range is widely dispersed, highlighted by the tighter concentration around the mean for India, Kenya, and Vietnam. In the second segment, Madagascar in 2007 is shown to have a wider degree of productivity heterogeneity than in 2004, almost in line with Uganda, while the third segment shows considerably wider dispersions across firms within Tanzania, and narrower dispersions for South Africa, Rwanda, and Mauritius, which displays the narrowest dispersion of the four. From these density functions, it is also clear that a number of countries have very wide productivity dispersions, particularly Tanzania and Cote dIvoire, where the mean value is not clear at all. Nonetheless, there is a high degree of overlap in productivity across countries although it is noticeable that the lower half of the Malaysia distribution overlaps the upper half of Uganda and Madagascar 2007. While Figure 2. is only indicative, Table 2. provides the reported productivity figures for the top of the first, second, and third quartiles of the range.20 This confirms in figures what was seen in the graphs. In
20

This is a relative measure of productivity, normalized by subtracting the sectoral median productivity for each firm which the median productivity of all firms to zero for ease of comparison across sectors. Not clear some words are wrong

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particular, although the mean level of productivity for Madagascar declined between 2004 and 2007, the level at the top of the first, second and third quartiles has increased, indicating a narrowing of the distribution between the two years that could be attributable to a real narrowing of the intra-sectoral productivity dispersion as well as to changes in the sample structure.
Table 2.7: Labor Productivity Heterogeneity within Countries (normalized with sectoral medians removed) Country Cote d'Ivoire India Kenya Madagascar2004 Madagascar2007 Malaysia Mauritius Rwanda South Africa Tanzania Uganda Vietnam
Overall

Q1 -1.89 -1.01 -0.15 -0.08 -1.62 0.33 -0.24 -0.40 0.35 -0.86 -1.26 -0.89
-0.76

Median -0.89 -0.33 0.52 0.45 -0.71 0.88 0.38 0.19 1.00 0.08 -0.32 -0.37
0.00

Q3 0.48 0.48 1.30 1.35 0.00 1.53 0.94 0.91 1.66 1.02 0.57 0.20
0.89

Q3/Q1 -0.25 -0.47 -8.91 -16.90 -0.00 4.70 -3.92 -2.30 4.72 -1.18 -0.45 -0.22
-1.17

Firms 124 1516 196 129 115 218 71 82 561 200 244 550
4006

A similar exercise can be carried out looking across the sectors represented in all the different survey countries. Table 2. is similar table to Table 2., illustrating the wide variation in labor productivity between the top of the first quartile and the top of the third quartile, again normalized so that all sectors have a median of zero.
Table 2.8: Productivity Heterogeneity within Sectors (normalized with sectoral medians removed) Q1 0.00 -0.65 -0.65 -0.65 -0.94 -0.40 -0.63 -0.96 -0.71 0.00 0.00 -0.47 0.00 -0.76 Median 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 Q3 0.00 0.79 0.65 0.77 0.92 0.91 0.89 1.02 1.06 0.00 0.00 0.48 0.00 0.89 Q3/Q1 -1.21 -1.01 -1.19 -0.98 -2.30 -1.42 -1.06 -1.49 -1.03 -1.17 Firms 0 715 412 550 404 90 160 1444 225 0 0 6 0 4006

Food (d) Garments (d) Textiles (d) Machinery & Equipment (d) Chemicals (d) Plastics & Rubber (d) Fabricated Metal Products (d) Other Manufacturing (d) Retail (d) Wholesale (d) Construction (d) Other Services (d) Transportation (d) Overall

Further comparisons can be drawn for exporting and non-exporting firms across the sample. Although the distribution of exporting firms is to the right, of non-exporting firms, their closeness and high degree

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of overlap suggests that many exporting firms in some countries are still less productive than nonexporters in other countries.
Figure 2.6: Labor Productivity for Exporting and Non-exporting Firms

Kernel Density of Labor Productivity

.4 0 -10 .1 Density .2 .3

-5 0 5 (Normalized Value-added per worker) Exporters Non-Exporters

10

kernel = epanechnikov, bandwidth = 0.2632

Evolution of Firm Performance in Madagascar

Following the analysis above of firms across countries, this section focuses exclusively on the unbalanced panel of Malagasy firms from 2004 and 2007 to better understand how firm growth rates and performance have changed over time in Madagascar. Given the likelihood of correlation between the unobserved error with firm-specific characteristics, fixed effects are employed, with the estimated coefficients presented in Table 2.. The use of fixed effects implies that we are estimating the effect of changes in the explanatory variables on changes in productivity. The equation to be estimated with employment growth or productivity as the dependent variable is as follows: = + + + +

where varies according to the exercise: firstly it is the employment growth rate observed over the previous three years, and secondly the observed productivity level, for firm I at time t normalized across sectors by subtracting the sectoral median, where is the set of time variant firm characteristics, is the set of time-invariant characteristics such as sector and location, is the unobserved individual 21 effect, and is the error term. Table 2. presents the estimated coefficients for firm growth rates. In column (1), firm age is the only characteristic apparently associated with firm growth, with the ageing of a firm associated with a decline in growth rate, statistically significant at the one percent significance level. This is close to the estimated
21

Random effects assumes that

is independent of

and

while fixed effects assumes is is not independent.

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coefficient with the cross-section of firms reported above, therefore suggesting consistency between the Madagascar panel and the full range of comparison countries in this regard.
Table 2.9: Panel Analysis of Firm Growth Rates
(1) 2.761 [2.126] -0.211 [0.219] -2.749 [0.709]*** 0.248 [0.243] 0.002 [0.015] (2) 4.321 [2.283]* -0.333 [0.229] -2.610 [0.709]*** 0.264 [0.241] 0.012 [0.016] -2.668 [1.819] 2.437 [2.428] 11.512 [9.622]

ln(Employees) ln(Empl)^2 ln(Firm Age) ln(Capital per empl.) Foreign Ownership (d) Private Ltd Co. Ltd. Partnership Other Legal Form Constant (d) N p

246 0.001

246 0.001

*** p<0.01, ** p<0.05, * p<0.1 Standard errors in brackets Note: Other legal forms dropped due to collinearity

Column (2) further introduces the legal form of the firm. This suggests little effect from becoming a private limited company, however with the addition of legal status, size becomes associated with higher growth rates up to 657 workers, while age remains negatively associated with employment growth. Other factors found to be correlated with growth, such as having a university-educated manager, the skilled employee share or trading across borders, are not found to important for this panel of Malagasy firms. The regression results for labor productivity are presented in Table 2.. As was found for the full crosssection of comparator countries, columns (1) and (2) again suggest that as firms grow, their productivity also increases, up to 247 or 215 employees, respectively, after which productivity stagnates or declines. In this dynamic analysis of Malagasy firms, only firm age appears to play a smaller role than for the larger cross-section, while capital intensity remains statistically significant in its positive relation to labor productivity; that is, increases in capital intensity are associated with increases in productivity. This may then relate to the growth patterns seen above: capital intensity normally requires access to finance,

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which in Madagascar is constrained, particularly for smaller firms.22 If lack of access to finance implies lower capital intensity, this would then also imply lower productivity. Columns (1) and (2) also include the foreign ownership dummy variable, which again has a small, positive, statistically significant impact on labor productivity. In (2), in contrast with the cross-section analysis and contrary to expectations, the share of skilled employees is negatively associated with labor productivity, implying that an increase in the share of skilled employees is associated with a decline in labor productivity. This may be a short-run effect, with a period required to adjust to changes in the staff structure, or may reflect the importance of workers rather than skilled workers only, in unskilledintensive sectors. Columns (3) and (4) introduce further variables relating to a university-educated manager, whether or not the firm is an exporter or importer, and whether or not it is a foreign license holder. The introduction of these variables reduces the already small sample by 20 firms, implying that a universityeducated manager and importing may relate positively to labor productivity, although the coefficients on firm size are no longer statistically significant even if maintaining the same sign. This suggests that the relationship is not very robust in this smaller sample.23
Table 2.2 Fixed Effects Panel Regression for Labor Productivity
(1) 0.716 [0.280]** -0.065 [0.030]** 0.008 [0.077] 0.1 [0.045]** 0.003 [0.002]* (2 0.634 [0.282]** -0.059 [0.030]* 0.027 [0.077] 0.102 [0.044]** 0.004 [0.002]* -0.005 [0.003]* (3) 0.313 [0.339] -0.028 [0.037] 0.039 [0.083] 0.08 [0.047]* 0.003 [0.002] -0.006 [0.003]** 0.447 [0.187]**
24

ln(Employees) ln(Empl)^2 ln(Firm Age) ln(Capital per empl.) Foreign Ownership (d) Skilled Employee Share Univerity Edu. Manager (d) Exporter (d) Importer (d) Foreign License Holder (d) Constant (d)
22

-2.831

-2.365

-1.798

(4) 0.179 [0.356] -0.023 [0.039] 0.063 [0.086] 0.076 [0.047] 0.003 [0.002] -0.006 [0.003]* 0.438 [0.187]** 0.048 [0.205] 0.391 [0.199]* 0.436 [0.291] -1.741

Byiers et al. (2008) use manufacturing data from Mozambique to analyse credit access and demand, finding that there is a strong correlation between firm size and credit access. 23 It is important to underline that the use of fixed-effect model with such a small panel is a particularly demanding technique, so it is not entirely surprising that when the sample decreases, the key variables of interest are no longer significant. 24 Given that the sample is small, and that fixed effects exploits the variation within firms rather than between firms, a similar regression is run using OLS on the same pool of firms, leading to very similar coefficient estimates, as seen in Table 18 in Appendix to Chapter 3.

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[0.746]*** Observations 181 Number of year 2 F-Test 3.685 R-squared 0.096 Prob > F 0.003 *** p<0.01, ** p<0.05, * p<0.1 Standard errors in brackets.

[0.790]*** 181 2 3.595 0.111 0.002

[0.873]** 163 2 3.191 0.127 0.004

[0.878]** 162 2 2.907 0.162 0.002

The Micro and Informal Sectors

As noted in the introduction to this study, an additional survey was carried out covering micro and informal companies. This survey is examined with two objectives in mind: one is to identify differences in results between the sample of larger firms above and this sample of micro-enterprises; and the other is to shed light on potential differences between formal and informal micro-enterprises. Having combined the sample of formal and informal micro-enterprises, Table 2. presents summary data categorized by formal/informal status and size of firms. These indicators suggest that productivity is invariably lower for informal firms than for formal firms of the same size. Although this is not clear evidence in itself of a productivity premium to formalityinstead potentially relating to firm characteristics not captured in these simple mediansit nonetheless suggests that formality may be associated with higher productivity.
Table 2.3 Micro and Informal Enterprise Sizes Labor Capital Productivity Intensity Informal 2,249.57 267.81 1 worker Formal 11,970.93 34,145.27 Informal 1,619.69 133.90 2 workers Formal 9,373.21 83,689.39 Informal 799.67 1,048.91 3 workers Formal 4,606.26 35,707.47 Informal 4,487.09 184.12 4 workers Formal 12,694.01 66,951.52 Informal 449.91 1,339.03 5 workers Formal 6 workers Informal -26.78 11.16 9 workers Formal -23.81 12 workers Formal 24 workers Formal 183.17 557,929.30 Note: Figures in 2005 US$ adjusted per PPP. Size Average Wage 0.00 1,285.47 0.00 753.20 535.61 892.69 313.33 1,526.50 578.46 107.12 1,124.79 37.26 No. Firms 34 10 27 12 19 29 9 44 3 0 1 1 0 1

Interestingly, the highest levels of labor productivity for informal firms are found in those with four workers, followed by one-worker firms. For formal firms, the most productive are also those with four

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workers, followed by two workers and one worker. The implication is that even within this small range of firm sizes, larger firms are more productive. A large part of this is likely to relate to the level of capital intensity, which also varies enormously between formal and informal firms of the same size, as shown in Table 2.. Although based on relatively small sub-samples, this result highlights some important differences between informal and formal firms of the same size which is likely to affect performance and also any policy recommendations intended to impact the informal sector. Informality is concentrated in particular sectors, and is commonly highest in the retail trade sector. As shown in

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Table 9 in Appendix, there is considerable variation in labor productivity and capital intensity across sectors. The Chemicals and Other Services sectors show the highest levels of productivity for formal firms, while for informal firms, the highest levels of labor productivity are in Other Manufacturing, most probably reflecting production characteristics which affect the visibility of the firm to the government authorities. Table 2. provides the same median information for firms by their location in or outside of the capital, and within or outside the household. The table shows that formal and informal firms in the capital city are more productive than their non-capital counterparts. Although the capital city productivity premium for formal firms is 28.5 percent, this is still below the almost 300 percent labor productivity difference between informal firms in the capital and outside. This is likely to reflect the better market opportunities for all types of firms in the capital city, as well as better access to infrastructures and agglomeration effects.
Table 2.4 Micro and Informal Enterprise Locations Labor Productivity 761.37 7,293.37 4,499.14 9,373.21 1,980.43 14,001.79 1,044.44 4,606.26 Capital Productivity 4.62 0.11 44.78 0.14 7.20 0.17 0.40 0.10 Capital Intensity 183.00 58,582.57 691.83 66,951.52 160.68 60,256.36 1,071.22 66,951.52 Average Wage 0.00 1,124.79 144.62 1,124.79 0.00 1,285.47 321.37 964.10

Location Non-Capital Capital City Outside Household Within Household Premises Informal Formal Informal Formal Informal Formal Informal Formal

No. Firms 14 54 13 27 24 36 3 45

Note: Figures in 2005 US$ adjusted per PPP.

As also shown in Table 2. there are considerable differences between firms operating from within and outside the household. Both formal and informal firms operating from the household display markedly lower levels of productivity than those outside the home, particularly in the case of formal firms. In contrast, capital intensity is marginally higher for formal firms operating from households, and considerably higher for informal firms within the household than outside. It is not clear why this should be the case, although it may relate to the difficulty of transporting machinery outside the home if there is no other fixed and secure place of work for machinery storage. It should also be noted that these figures do not reflect the sector or location in Madagascar of the business, which may be important. Further potentially important characteristics are shown in Table 2., namely manager education, the reason given for operating a micro-enterprise, and information on credit. More education is associated with higher productivity for both informal and formal enterprises, although interestingly, for managers with vocational training, these are more productive in informal than formal firms. Again, this may relate to the type of activity carried out, but it is indicative of the high level of heterogeneity among firms depending on a wide range of factors.

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As for the reason for starting a firm, formal firms are more productive no matter the reason given. However, for formal firm managers citing a lack of alternatives, commonly associated with survivalist firms, productivity is in fact higher than for those who cite a business opportunity. In contrast, for informal firms, productivity is lower for those citing a lack of alternatives, more in line with the interpretation given above. This then highlights a potentially important motivational distinction between formal and informal firms, which may impact productivity in different ways.
Table 2.5 Micro and Informal Enterprise Other Characteristics Labor Productivity 883.76 4,766.95 799.67 6,831.41 2,289.74 1,605.27 14,461.53 21,966.12 2,558.89 7,927.06 674.87 12,238.74 1,619.69 7,846.72 29,889.83 Capital Productivity 6.60 0.06 5.14 0.15 171.00 0.05 0.42 0.36 11.52 0.15 2.82 0.07 6.12 0.10 445.44 0.16 Capital Intensity 912.77 147.29 60,256.36 241.03 39,612.98 948.48 46,531.30 3,151.19 83,689.39 222.28 61,372.22 388.32 68,178.96 267.81 56,908.79 490.98 93,732.12 Average Wage 964.10 0.00 964.10 642.73 1,365.81 428.49 1,504.18 0.00 1,124.79 152.65 709.69 0.00 1,124.79 401.71 1,446.15

no education primary school (complete or not) secondary school (complete or not) vocational training some university training Business or Opportunity Lack of Alternatives No credit Credit Access

Informal Informal Formal Informal Formal Informal Formal Informal Formal Informal Formal Informal Formal Informal Formal Informal

No. Firms 3 34 5 38 42 11 16 7 34 55 91 38 6 86 89 7 8

Formal 14,961.43 Note: Figures in 2005 US US$ adjusted per PPP.

The above discussion, based on median statistics, is only descriptive, providing indicative evidence but nothing that allows conclusions to be drawn regarding associations across firm characteristics. In order to better understand what characteristics are associated with high labor productivity across this sample of firms, a similar regression is employed with labor productivity as the dependent variable and a variety of firm characteristics included as explanatory variables. Here, an additional dummy variable is included for whether or not the firm is formal, as follows: = + + +
.

The results are presented in Table 2. for two specifications. Under column (1), labor productivity is again correlated with firm size up to a certain point, after which it is negatively associated, as found for the sample of larger firms. However, here the turning point is at three workers, suggesting that taking all other factors into account, on average across the sample, labor productivity peaks for firms with three workers before declining. In fact, the weak statistical significance of employee numbers and the fact that this is not statistically significant under specification (2) may suggest that the relationship is simply negative, with smaller firms displaying higher productivity on average, contrary to the stylized facts across the typical full firm size distribution. 45 | P a g e

For this sample of micro firms, firm age is not found to be statistically significant in its relation with labor productivity, while capital intensity is positively correlated with productivity, statistically significant at the five percent level in (1) and at ten percent in (2).
Table 2.6 Micro and Informal Enterprise Labor Productivity Regression Coefficients (1) 2.169 [0.891]** -0.965 [0.276]*** 0.160 [0.235] 0.483 [0.168]*** -2.271 [1.057]** 0.218 [1.111] 0.000 [0.000] -3.123 [0.724]*** 3.059 [0.706]*** 0.000 [0.000] -0.117 [1.126] -0.283 [0.742] 1.011 [0.543]* 1.928 [0.634]*** 0.000 [0.000] -0.155 [0.545] -0.516 [1.052] -0.346 [0.508] 0.562 [0.566] 4.267 [1.052]*** 75 0.401 4395 0 (2) 1.654 [0.836]* -0.880 [0.283]*** 0.160 [0.241] 0.320 [0.165]* -1.565 [0.939] 0.412 [1.010] 0.000 [0.000] -3.259 [0.904]*** 0.830 [0.918] 0.000 [0.000] -0.401 [1.106] -0.383 [0.722] 0.711 [0.505] 1.161 [0.699] 0.000 [0.000] -0.290 [0.540] -0.727 [0.947] 0.974 [0.561]* 1.117 [0.540]** 5.446 [1.096]*** 75 0.490 13.39 0

ln(Employees) ln(Empl)^2 ln(Firm Age) ln(Capital per empl.) Formal_d Garments (d) Textiles (d) Mechinery & Equipment (d) Chemicals (d) Plastics & Rubber (d) Fabircated Metal Products (d) OtherMan_d Retail Trade (d) Wholesale Trade (d) Construction (d) Other Services (d) Transport (d) Univerity Edu. Manager (d) E-mail (d) Constant Observations Number of year Prob > F F test

Robust standard errors in brackets. *** p<0.01, ** p<0.05, * p<0.1

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In what is an initially surprising result, the dummy variable for formality is negatively correlated with labor productivity, suggesting that on average and ceteris paribus, formal firms have lower productivity. However, it should be recalled from the tables above that formal firms were more likely to be large and capital intense, with this latter factor potentially capturing all the higher productivity of formal firms seen above. Nonetheless, the result that micro-enterprises with similar levels of capital and in the same location and sector may be more productive by being informal may relate to the disproportionate cost to micro firms of being formal, in terms of time spent on compliance and other costs, which may indeed reduce overall firm productivity. This would imply that these micro enterprises remain informal out of choice rather than being excluded from the formal sector. For those firms reporting on manager education, this appears not to be statistically related to labor productivity, although use of e-mail apparently is associated with higher productivity. While e-mail usage may indeed have a direct impact on productivity by cutting communication costs and time, it is also likely that this reflects other unobserved firm characteristics relating to their ability to adopt new techniques and access information, both of which are also likely to have important impacts on productivity.25 In summary, a simple correlation analysis of firms at the lower end of the firm size distribution suggests that while informal companies are less productive on average, indicative of informality being a consequence of exclusion due to their low productivity rather than choice, a more robust multivariate regression suggests the oppositethat, ceteris paribus, formal firms are less productive, therefore suggesting that informality may be a choice rather than a consequence of exclusion, something which is again consistent with an unfavorable business environment and the growth patterns seen above, where small firms are unlikely to have high growth rates, on average. Further, the inverse-U relationship found between firm size and labor productivity also holds for micro and informal firms, but with a considerably lower turning point of three workers. That is, firm growth rates increase for up to three workers and then decline. This suggests that policies to increase formality will founder until such time as the business environment for small and medium firms is made more favorable to growth and increasing productivity.

An additional approach might be to estimate separate equations for formal and informal firms, however the sample is so small that this does not yield very significant results.

25

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Chapter 3: External Factors Affecting Firm Performance

Introduction
Following the above analysis of firm growth and performance, this chapter analyzes some additional external factors reported as affecting firm performance. These can be broken down into two groups: those associated with infrastructure, and those relating to indirect transactions costs. In terms of infrastructure, electricity supplies have an especially large impact on Malagasy firms, with the vast majority of firms reporting power outages in both surveys. The responses on perceived obstacles to doing business also show that Malagasy firms rate electricity supply as a major problem. This chapter also discusses transport issues in terms of the share of shipments lost to breakage, spoilage, or theft. Although transport concerns are overshadowed by electricity supplies as a constraint, increased costs associated with transport significantly affect firm competitiveness. The percentage of Malagasy firms that categorized transportation as a major or very severe constraint increased between 2004 and 2007, as did the percentage ranking it as the largest obstacle. At the same time, the percentage of exports lost to breakage or spoilage increased during this period, potentially pointing to logistics bottlenecks that hamper Malagasy firms. Among indirect transactions costs, this chapter highlights crime and corruption issues. Between 2004 and 2007 there was a substantial increase in the percentage of Malagasy firms citing crime as either a major or very severe obstacle, as well as in the percentage listing it as the largest obstacle. Perceptions of the obstacle posed by corruption remained relatively stable between 2004 and 2007, relative to other categories, with a slight increase in the percentage of Malagasy firms listing it as a major or very severe obstacle, and a slight decline in the percentage listing it as the largest obstacle. While corruption is less problematic in Madagascar than in many comparator countries, it remains a significant negative aspect in the investment climate.

Infrastructure
In this section, we explore the impact of some specific infrastructure-associated constraints on Malagasy firms. The importance of these constraints is analyzed by asking managers to rank various potential obstacles to enterprise operations in their order of importance, from no obstacle to very severe obstacle. Figures 3.1(a) and (b) report the percentage of Malagasy sample firms categorizing the various obstacles as either major or very severe.26 Figure 3.1(a) details the categories where that percentage has increased between 2004 and 2007, and 3.1(b) shows the categories where it has decreased. Figure 3.1(a) shows that the percentage of firms ranking the following as either major or very severe increased between 2004 and 2007: electricity; political and regulatory instability; crime, theft, and disorder; corruption; and transportation. The increase in the percentage of firms reporting corruption
26

For categories included in both years.

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as the principal constraint was lower than for the other categories, while the largest increase in constraint was for electricity supply, closely followed by political and regulatory stability, presumably reflecting fears prior to the current crisis.
Figure 3.1(a): Percentage of Firms Categorizing Obstacles as Major or Very Severe Increases
70% 60% 50% 40% 30% 20% 10% 0%
Electricity Instability (political & Crime, theft, disorder regulatory) Corruption Transportation

Madagascar2004

Madagascar2007

Figure 3.2(b) shows a decline between 2004 and 2007 in the percentage of firms ranking the following as major or very severe constraints: tax rate, financing, competitive practices, tax administration, courts, trade and customs regulations, inadequately educated workforce, business permits and licensing, telecommunications, and labor regulations. While some of these aspects may have improved since 2004, it is important to keep in mind that these are subjective responses which therefore also reflect these obstacles relative to each other, rather than in any objective sense.
Figure 3.1(b): Percentage of Firms Categorizing Obstacles as Major or Very Severe Decreases
60% 50% 40% 30% 20% 10% 0%
Tax Rate Financing Competitive practices Tax Admin Courts Trade & Inadequately Business Customs educated licensing and Regulations workforce permits Telecom Labor Regulations

Madagascar2004

Madagascar2007

In addition to ranking obstacles, firms were asked to identify the biggest constraint to doing business from the same list. Again, Figure 3.2 shows where the percentage has increased between 2004 and 49 | P a g e

2007, and 3.2(b) where it has decreased.27 Here, again, electricity emerges as the largest constraint in 2007 among Malagasy firms, with a substantial increase from 10 percent of sample firms in 2004 to 22 percent in 2007.28 This is closely followed by a very large jump in the share of firms citing crime, theft, and disorder, followed by competitive practices and political instability.
Figure 3.2: Largest Obstacle by Percentage of FirmsIncreases

25% 20% 15% 10% 5% 0%

Madagascar2004

Madagascar2007

Based on this brief overview of constraints, the remainder of this chapter focuses on electricity supply, transport-related losses, water supply, and telecommunications supply (high-speed broadband internet and the wait for a telephone connection). Electricity As seen above, poor electricity supply is perceived as an important obstacle to Malagasy firm performance. In 2007, 90 percent of firms participating in the Enterprise Survey reported experiencing at least one power outage, down only slightly from 94 percent in 2004. For the 135 firms surveyed in both years, 96 percent experienced outages in 2007 and 95 percent in 2006. These power outages led to a median loss in sales of 3 percent in 2007 and 5 percent in 2004.29 Given the potentially narrow profit margins for many of these firms, this represents a substantial burden. Electricity Supply as a Major Obstacle To put this in context, Figure 3.2 shows the percentage of firms that categorized electricity as a major or very severe obstacle in Madagascar and selected comparator countries. Across countries, the share of firms reporting electricity as a major or very severe obstacle is highest in Tanzania and Uganda,
27

Because there were several options to choose from in 2004 which were not available in 2007and because choices of the largest obstacle are mutually exclusive, unlike rankings of the severity of each type of obstaclethe comparability between Madagascar 2004 and Madagascar 2007 may not be reliable. 28 There was a similar increase (13 percent and 28 percent, respectively) among firms included in both the 2004 and 2007 surveys. 29 This difference was found to not be statistically significant; see regression in Appendix number?. The figures are 8 percent and 4 percent, respectively, for firms included in both 2004 and 2007.

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with very high levels of reported complaints, closely followed by Madagascar in 2007. The best performers on this measure are Mauritius, Malaysia, and Vietnam. This is similar to Figure 3.3 (in Appendix n?) which shows the share of firms citing electricity as the largest obstacle, where Madagascar in 2007 is lower than Tanzania, Uganda, and Rwanda.30
Figure 3.2: Percentage of Firms Categorizing Electricity as a Major or Very Severe Obstacle
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Table 3.1 breaks the country sample into different size groups, and compares exporters with nonexporters and companies with a generators versus companies without one. This shows no clear pattern among different firm sizes across countries, but in Madagascar in 2004, a slightly lower percentage of medium-sized than other sized firms reported electricity supply as a major or very severe obstacle, while in 2007 this was the case for large firms; and the share reporting electricity as an obstacle was larger for all firm sizes in 2007 than in 2004.
Table 3.1: Percentage of Firms Categorizing Electricity as a Major or Very Severe Obstacle Micro & Small 43% 63% 47% 39% 45% 12% 5% 49% 21% 84% 85% 11%

Country Madagascar2004 Madagascar2007 Cote d'Ivoire India Kenya Malaysia Mauritius Rwanda South Africa Tanzania Uganda Vietnam

Overall 41% 61% 49% 36% 51% 15% 13% 54% 23% 89% 86% 16%

Medium 40% 63% 53% 35% 50% 13% 16% 60% 23% 97% 90% 15%

Large 42% 54% 61% 31% 62% 19% 12% 85% 29% 94% 88% 17%

Exporter 43% 67% 65% 36% 59% 17% 12% 63% 30% 98% 84% 18%

Nonexporter 40% 60% 48% 36% 46% 11% 14% 53% 21% 87% 86% 14%

Generator 43% 77% 71% 42% 56% 19% 12% 32% 82% 98% 93% 17%

No Generator 41% 69% 63% 30% 46% 14% 13% 25% 64% 86% 90% 15%

30

These data were not included for India, Malaysia, Mauritius, or Vietnam.

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A marginally higher percentage of Malagasy exporters than non-exporters reported electricity supply as a major or very severe obstacle, similar to all other countries other except Mauritius, where exporters complained less than non-exporters, perhaps due to better electricity supply in the export processing zones. In most countries, including Madagascar in 2004 and 2007, a higher percentage of firms with generators categorized electricity as a major or very severe obstacle, presumably reflecting what led them to purchase the generator. 31 Electricity Generation The constraints associated with poor electricity supply have led many firms to invest in generating at least a portion of their own electricity. In 2004, 22 percent of firms in Madagascar owned a generator, and this increased to 33 percent in 2007 (20 percent and 37 percent for firms included in both survey years). Despite this increase, Malagasy firms in 2007 still generated less of their own electricity than firms in Rwanda, Kenya, India, and Tanzania, as shown in Figure 3.3(a). Further, the percentage was higher in all comparator countries than in Madagascar in 2004, when only 4 percent of surveyed firms generated their own electricity, suggesting that this may be a recent phenomenon in Madagascar. This move away from relying on state electricity implies that firms incur major costs to ensure a stable electricity supply, underlining the potential costs to firms when electricity supply becomes unreliable.32
Figure 3.3 (a): Percentage of Firms Generating Some of Their Own Electricity (of firms owning a generator) 60% 50% 40% 30% 20% 10% 0%

Figures 3.3(b) and (c) present similar information by firm size and export status. These figures show that higher percentages of large firms and exporters generated their own electricity across all countries relative to small and medium firms and non-exporters, respectively.

There is clear endogeneity in the perception data. For example, firms buying generators are those that most acutely suffer because of electricity outages. 32 Part of this difference could be due to differences in sampling. Looking at only the firms included in both years of the survey, 35 percent and 3 percent of firms that owned generators in 2007 and 2004, respectively, generated at least some of their own electricity.

31

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Figure 3.3 (b): Percentage of Firms Generating Some of Their Own Electricity (of firms owning a generator)
120% 100% 80% 60% 40% 20% 0%

Micro & Small

Medium

Large

These figures are in turn based on higher percentages of large and exporting firms that own generators, meaning that businesses in these categories were both more likely to own a generator and, if they owned one, more likely to use it. There are two possible reasons for this. Larger firms and exporters may have more to lose from unreliable electricity supplies and therefore may benefit more from owning a generator, relative to the costs of owning and operating one. Another possibility may be that larger firms and exporters have greater access to finance or are large enough to be willing to undertake the lumpy investments required to buy a generator.
Figure 3.3 (c): Percentage of Firms Generating Some of Their Own Electricity (of firms owning a generator) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Exporter

Non-exporter

Firm Characteristics and Electricity Supplies as a Constraint Building on the above descriptive analysis, econometric analyses are also carried out to determine the firm characteristics associated with a) whether or not electricity supply is perceived as a major or

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very severe: obstacle; and b) whether an enterprise generates more than 0% of its own electricity.33 In both cases we use an ordinary least square model (OLS).34 The characteristics used in all of the regressions are: firm size (measured by the log of the number of employees); firm size squared (to capture any non-linearity in the relationship between the outcome of interest and firm size); and whether the firm is an exporter, sales per worker, and city-country dummies. We also included interaction terms between firm size, firm size squared, and the exporter dummy and Antananarivo 2004 and 2007, to capture the Antananarivo-specific relationships between the dependent variable and these firm characteristics. Madagascar 2004 and Madagascar 2007 are treated as two separate countries in this analysis.35 Table 3.4(a) gives the regression coefficients for the dependent variable of whether or not electricity is perceived as either a major or very severe constraint. A relationship between firm size and the degree of constraint is suggested by the coefficient on firm size, which is statistically significant and positive in all specifications, with the square of firm size only statistically significant under specification A2. On average, controlling for countries and major cities, large firms are more likely to categorize electricity as major or very severe. This may relate to a number of factors. Among these, large firms are likely to be more dependent on electricity and therefore to suffer relatively more from outages, thus citing this as a more serious hindrance than smaller firms. Further, controlling for location is already likely to capture large firms located near capital cities with the best electricity supplies, so that those large firms outside major cities are even more likely to suffer from poor electricity supplies and to value better electricity infrastructure. A similar situation is found for exporter status, which is statistically significant and positive in all specifications. The interaction term between firm size and Antananarivo 2004 is statistically significant and negative, indicating that larger firms in Antananarivo in 2004 were less likely to categorize electricity as major or very severe, in line with the descriptive results above. However, the interaction term between firm size squared and Antananarivo 2004 is statistically significant and positive, indicating that as firm size increases, the probability of listing electricity as a major or very severe obstacle becomes

A third and fourth analysis are carried out regarding the perception of electricity as the largest obstacle; and whether or not firms generate more than 10% of their electricity. The results are reported in Appendix to Chapter 4. 34 The OLS model used in the context of a limited dependent variable has two limitations. The first is the heteroscedasticity of the errors, and the second is that the prediction can lie outside the 0-1 interval. However, the results in terms of magnitude and significance tend to be very similar to a non-linear model such as the probit, and we correct for the heteroscedasticity problem by using robust standard errors. As a robustness check, we show the probit results in Appendix n?. The results are qualitatively the same. 35 We tested alternative specifications of the model, including variables such as value added per worker and capital per worker, but those were found to be statistically insignificant in all cases and therefore have not been included in the final specification. We also tested a version with sector and country dummies and found that sectors were not nearly as important as countries.

33

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increasingly large, perhaps again reflecting the greater costs associated with poor electricity supply for larger firms.36
Table 3.4(a): Whether a Firm Classifies Electricity as a Major or Very Severe Obstacle
ln(Emp) ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07 Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007 Constant 0.206*** -0.03 0.301*** -0.08 0.381*** -0.03 0.572*** -0.04 0.112*** -0.03 8168 0.237 0.843*** -0.23 0.301*** -0.08 0.560*** -0.21 0.572*** -0.04 0.094*** -0.03 8168 0.238 0.191*** -0.04 0.300*** -0.09 0.404*** -0.03 0.592*** -0.05 0.121*** -0.03 7796 0.233 -0.323*** -0.1 -0.085 -0.11 0.036*** -0.01 0.009 -0.01 A1 0.027* -0.01 -0.001 0 A2 0.037** -0.01 -0.003* 0 A3 0.02 -0.01 -0.001 0 0.025** -0.01 0.003 0 A4 0.031** -0.01 -0.002 0 0.022* -0.01 0.003 0 -0.373*** -0.11 -0.091 -0.12 0.040*** -0.01 0.006 -0.02 0.004 -0.09 0.083 -0.07 0.934*** -0.25 0.299*** -0.09 0.632*** -0.24 0.591*** -0.05 0.101*** -0.03 7796 0.235

N R2 * p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA. Other city-countries omitted from the table for space reasons. For full list, see Appendix n?.

In Table 3.3(c) the dependent variable is whether a firm generates any of its own electricity.37 The coefficients on size and its square are both statistically significant (and positive and negative, respectively) suggesting a non-linear increase in the probability that a firm generates some electricity which increases sharply with size before leveling off at a high probability for large firms. This indicates that, again, controlling for country and major cities, larger firms are more likely to generate some of their own electricity. Exporter status is also statistically significant and positive in almost all

In Table 3.3(b) in Appendix n?, the dependent variable is whether or not electricity is perceived as the largest obstacle to doing business giving similar results to those found here. 37 In Table 3.3(d) in appendix n?, the dependent variable is whether a firm generates greater than or equal to 10 percent of its own electricity. Both have broadly similar results.

36

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specifications,38 indicating that across the full selection of comparator countries, exporters are also more likely to generate some of their own electricity, confirming the descriptive statistics discussed above.
Table 3.3(c): Whether a Firm Generates Greater than 0% of Its Own Electricity
C1 0.211*** -0.02 -0.012*** 0 C2 0.210*** -0.02 -0.012*** 0 C3 0.202*** -0.02 -0.012*** 0 0.083*** -0.01 0.01 -0.01 C4 0.202*** -0.02 -0.012*** 0 0.088*** -0.01 0.01 -0.01 -0.263*** -0.06 -0.087 -0.13 0.020*** -0.01 0.009 -0.02 -0.101*** -0.03 -0.03 -0.09 0.560*** -0.13 -0.101** -0.05 0.315 -0.24 0.471*** -0.1 -0.429*** -0.03 6481 0.243

ln(Emp) ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07 Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007 Constant N R2

-0.236*** -0.06 0.001 -0.12 0.016** -0.01 -0.002 -0.01

-0.172*** -0.02 -0.113*** -0.04 0.099*** -0.03 0.376*** -0.09 -0.415*** -0.03 6697 0.236

0.481*** -0.13 -0.112*** -0.04 0.129 -0.22 0.380*** -0.09 -0.423*** -0.03 6697 0.239

-0.163*** -0.02 -0.104** -0.05 0.121*** -0.04 0.466*** -0.1 -0.418*** -0.03 6481 0.24

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA. Other city-countries omitted from the table for space reasons. For full list, see Appendix n?.

The coefficients on the interaction term between Antananarivo 2004 and firm size and firm size squared are significant and negative and positive, respectively, thus reducing the size-electricity generation relationship for Antananarivo in 2004, potentially due to better electricity supplies there. Indeed, the Antananarivo dummy variables suggest that across all firm sizes, firms were less likely to generate their own electricity in 2004 than in the rest of Madagascar and the base case, but that in 2007, Antananarivo firms were more likely to generate their own electricity than in the base case, and even more likely to do so in the rest of Madagascar. The interaction term between Antananarivo 2004 and exporter status is
38

With the exception of d4.

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statistically significant and negative: exporters in Antananarivo in 2004 were less likely to have generated their own electricity. This result is in contrast to the result for all countries. Overall, then, electricity supply is clearly viewed as a constraint, particularly by larger firms and exporters, leading to their increasing levels of self-generation. In terms of the analysis of firm growth and productivity carried out in the previous chapter, where a non-linear effect was found between firm size and firm growth and productivity, it is likely that electricity supply may be playing a role. Investments required to buy a generator are lumpy, and if a small firm is affected by financial constraints, it may be forced, despite its potential, to postpone such investments and therefore be unable to grow. Transportation Issues Although transportation issues are ranked lower in terms of the degree of obstacle they pose to doing business in Madagascar, they are likely to have a major impact on the competitiveness of Malagasy firms and relate to issues such as crime and corruption. Domestically, transportation infrastructure is necessary for connecting suppliers, firms, and consumers. For exports (or for imported intermediate goods), the ability of the transportation infrastructure to connect Malagasy firms to global supply and distribution networks is crucial. In addition, the 2007 and 2010 Logistics Performance Indicators show that for countries with the same per capita income, those with the best logistics performance experience an additional 1 percent of GDP growth and an additional 2 percent of trade growth.39 Madagascars maritime transport links include well-developed shipping routes to Africa, Asia, and Europe. However, the mountainous jungle interior, landslides, and typhoons have limited the internal transport infrastructure outside the major cities. As of 2006, 33 percent of rural communities were still cut off from the network of roads, and only 39 percent of rural communities have access to regular transport links.40 Only 12 percent of roads in Madagascar are paved,41 only 30 percent of airports have paved runways, and only one airport has a runway longer than 3,047 meters.42 These are likely to raise the costs to firms of shipping goods domestically and internationally. Shipping Losses The Enterprise Survey data provide some insights into the problems associated with the shipment of goods. One of these variables is the percentage of annual shipments for which an establishment uses its own transport rather than subcontracting to a transport company. Malagasy firms rank higher than those in all other comparator countries, with a median of 100 percent in 2004 and 90 percent in 2007, as seen in Figure 3.4. While high, the reduction in use of own transport may reflect increasing reliance on third parties, indicating some improvements in transport conditions.

39 40

Source: The World Bank, Connecting to Compete 2010: Trade Logistics in the Global Economy. Source: EIU Country Report 2008. 41 As of 2003 (Source: CIA Factbook). 42 As of 2009 (Source: CIA Factbook).

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Figure 3.4: Percentage of Annual Shipments Using Establishments Own Transport (median) 120 100 80 60 40 20 0

A further variable of interest is the percentage of shipments lost to spoilage or breakage during domestic and export shipments. For domestic shipments, Madagascar performs well relative to other countries despite poor road quality, with a loss of approximately 1.2 percent in 2004 and 2007, with little change between those two years, shown in Figure 3.5. This is only marginally better than most other firms, but considerably behind India and particularly Mauritius, although the small size of Mauritius presumably implies only limited domestic transportation requirements.
Figure 3.5: Percentage of Domestic Shipments Lost to Spoilage or Breakage (mean) 2.0% 1.5% 1.0% 0.5% 0.0%

For exports, the percentage of shipments lost to spoilage or breakage fell between 2004 and 2007, from 1.9 percent to 0.7 percent.

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Figure 3.6: Percentage of Exports Lost to Spoilage or Breakage (mean) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Another variable relevant to transportation issues is the percentage of shipments lost to theft. Again, this is broken down into domestic shipments and exports, displayed in figures 3.7 and 3.8.43 The percentage of domestic shipments lost to theft increased between 2004 and 2007 from 0.2 percent to 1.3, worsening the Malagasy position relative to its comparator countries and putting Madagascar in 2007 behind only Tanzania and Cote dIvoire in terms of the percentage share of shipping goods lost to theft. Although these values are means, clearly shipping losses can have a significant effect on firms profitability.
Figure 3.8: Percentage of Domestic Shipments Lost to Theft (mean) 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%

The percentage of exported shipments lost to theft fell slightly in Madagascar between 2004 and 2007, at 0.4 percent vs. 0.3 percent. Madagascars position relative to its comparator countries was somewhere in the middle, but considerably better than Tanzania, Uganda, and Kenya. The percentage of Malagasy exports lost to theft also fell, from a mean of 0.7 percent in 2004 to 0.3 percent in 2007.
43

Also in this graph, we use the mean rather than the median because the medians are all zero.

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There is no clear pattern across countries for firm sizes. In Madagascar in 2004, large firms lost the most, and in 2007, small firms lost the most.
Figure 3.9: Percentage of Exports Lost to Theft (mean) 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Firm Characteristics and Shipping Losses The losses to shipping damage and theft can be examined econometrically, as done for electricity constraints, relating the outcome variables discussed above with firm characteristics. The outcome variables examined are the percentages of domestic shipments lost to spoilage and breakage, and the percentages of domestic shipments lost due to theft.44 Given that these analyses focus on percentages lost, where firms responses are truncated at zero, a tobit model is employed. The regressors used are the same as in the electricity regressions.45 We also include interaction terms between firm size, firm size squared, and the exporter dummy and Antananarivo 2004 and 2007, to capture the Antananarivospecific relationships between the dependent variable and these firm characteristics.46 Table 3.4(a) reports the marginal effects of various firm characteristics associated with the percentages of domestic shipments lost to spoilage or breakage.47 As the table shows, firm size and firm size squared are statistically significant and positive and negative, respectively, in all specifications, again implying a non-linear relationship between firm size and the dependent variable. This means that for firms in all countries, larger firms reported higher percentages lost to breakage or spoilage, but at a decreasing marginal rate as size increases. That is, the loss increase between small and medium firms is larger than the increase between medium and large firms, although the share lost is always increasing (up to a firm size of approximately 779 workers).

44 45

The small number of firms reporting not clear The omitted city-country dummy is Johannesburg, South Africa. 46 As before, we also test whether the coefficients for Antananarivo 2004 and Antananarivo 2007 are statistically different, and whether the coefficient for Antananarivo 2007 is statistically different from the coefficients for Kampala (Uganda), Dar es Salaam (Tanzania), and Nairobi (Kenya). The results of this can be found in Appendix n?. The results can be grouped by whether the regressions are on percentages lost (to either spoilage and breakage or theft) on domestic shipments or on exports. 47 Vietnam not included because of lack of data.

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A firms export status is not statistically significant. However, the interaction terms between exporter and both Antananarivo 2004 and 2007 are statistically significant and negative, indicating that on average, exporters in Antananarivo (in both years) lost a lower percentage of domestic shipments to breakage or spoilage than other firms. This is potentially due to a lower use of domestic transport, given their concentration on foreign markets for sales and potentially also for inputs. The Antananarivo interaction terms with size are not statistically significant, implying the same effects for all firms in Antananarivo in 2004 and 2007, regardless of the firm size. The coefficients on Antananarivo 2007 vs. Kampala, Dar es Salaam, and Nairobi are statistically different from each other for all specifications, pointing towards a competitive disadvantage for firms located in Antananarivo versus companies in other countries.
Table 3.4(a): Percentage of Domestic Shipments Lost to Breakage or Spoilage (marginal effects)
A1 2.592*** -0.89 -0.202* -0.1 A2 2.882*** -0.95 -0.255** -0.11 A3 2.537*** -0.89 -0.193* -0.1 -0.976 -0.71 -0.058 -0.26 A4 2.628*** -0.94 -0.220** -0.11 -0.378 -0.75 -0.059 -0.26 2.131 -4.75 3.498 -6.14 0.02 -0.47 -0.314 -0.73 -7.874** -3.71 -6.548* -3.56 -13.067 -10.93 -6.789** -3.24 -7.908 -12.06 -5.782 -3.73 -13.005*** -2 4109 0.023

ln(Emp) ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07 Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007 Constant N Pseudo-R2

2.734 -4.34 3.079 -5.89 -0.078 -0.43 -0.396 -0.7

-5.212*** -1.41 -5.658** -2.77 -1.608 -1.51 -2.979 -3.07 -13.577*** -1.95 4284 0.022

-15.443 -10.03 -5.671** -2.76 -6.988 -11.69 -3.097 -3.07 -13.791*** -2.03 4284 0.022

-5.937*** -1.49 -6.839** -3.24 -1.671 -1.54 -5.789 -3.74 -12.933*** -1.93 4109 0.022

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA. Other city-countries omitted from the table for space reasons. For full list, see Appendix n?.

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Table 3.4(b)48 presents the results of analyzing the share of domestic shipments lost to theft.
Table 3.4(b): Percentage of Domestic Shipments Lost to Theft (marginal effects)
C1 ln(Emp) 0.814 (0.83) ln(Emp)^2 0.009 (0.10) Exporter C2 0.582 (0.86) 0.036 (0.11) C3 0.975 (0.87) -0.003 (0.10) -0.216 (0.73) Sales/Worker -6.669 (7.20) ln(Emp)*Antananarivo04 7.321 (6.49) ln(Emp)*Antananarivo07 5.928 (5.90) ln(Emp)^2*Antananarivo04 -0.693 (0.65) ln(Emp)^2*Antananarivo07 -0.751 (0.71) Exporter*Antananarivo04 C4 0.733 (0.89) 0.027 (0.11) -0.02 (0.76) -6.77 (7.28) 3.701 (7.35) 7.118 (6.55) -0.418 (0.72) -0.822 (0.80) 1.206 (4.80) Exporter*Antananarivo07 -5.165 (3.66) Antananarivo 2004 -10.643*** (1.81) Other Madagascar 2004 -5.509* (2.88) Antananarivo 2007 -1.07 (1.51) Other Madagascar 2007 1.798 (2.75) Constant -12.153*** (1.85) N 4510 -27.782* (15.11) -5.511* (2.88) -11.552 (11.59) 1.803 (2.75) -11.717*** (1.88) 4510 -11.655*** (2.06) -12.287** (4.95) -1.242 (1.61) 2.53 (3.15) -12.552*** (1.91) 4338 -19.26 (16.69) -12.266** (4.94) -13.544 (12.66) 2.576 (3.15) -12.170*** (1.93) 4338

Pseudo-R2 0.049 0.049 0.05 0.051 * p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix n?.

48

Vietnam not included because of lack of data.

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Here there are very few statistically significant coefficients, implying similar levels of domestic shipment losses to theft across different types of firms, both in the entire sample and in Madagascar. Nonetheless, the negative coefficients on Antananarivo and other Madagascar 2004 are both statistically significant and large, but become insignificant in 2007, suggesting an important increase in losses due to theft between 2004 and 2007 in Madagascar. In summary, the above analysis suggests that larger firms and exporters find electricity supplies to be more of a constraint than smaller or non-exporting firms, and are more likely to generate their own electricity. This may be because they are able to purchase generators through greater access to finance, or have a greater need to do to so due to the potential scale of the losses. Similarly, the share of domestic shipments lost to breakage or spoilage increases with firm size, while domestic shipping losses to theft show no discernible pattern relating to firm size, implying similar losses across all comparator countries.

Transaction Costs
In this section, we examine the indirect transaction costs faced by Malagasy firms. The Doing Business 2010 rankings provide a brief overview, followed by a more detailed analysis of crime- and corruptionrelated constraints. Doing Business Relative to its comparator countries, Madagascars Doing Business 2010 ranking overall (134 out of 180) is low, higher only than Cote dIvoire, as seen in Table 3.5. In the different categories, Madagascars rankings are also fairly low, with the exception of Starting a Business, where it is ranked twelfth. It also ranked relatively high (top third) for Protecting Investors.
Table 3.5: Doing Business 2010
Tradin g across border s 160 94 147 111 35 19 170 148 108 145 74

Ease of doing busines s Cote d'Ivoire India Kenya Madagascar Malaysia Mauritius Rwanda South Africa Tanzania Uganda Vietnam 168 133 95 134 23 17 67 34 131 112 93

Startin ga busines s 172 169 124 12 88 10 11 67 120 129 116

Dealing with constructio n permits 167 175 34 108 109 42 89 52 178 84 69

Employin g workers 129 104 78 152 61 36 30 102 131 7 103

Registeri ng property 145 93 125 152 86 66 38 90 145 149 40

Gettingcre dit 150 30 4 167 1 87 61 2 87 113 30

Protectinginvest ors 154 41 93 57 4 12 27 10 93 132 172

Payin g taxes 152 169 164 74 24 12 60 23 119 66 147

Enforcin g contract s 127 182 126 155 59 66 40 85 31 116 32

Source: Doing Business 2010.

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Crime Although the impact of crime on Malagasy enterprises has been touched upon in the context of losses to theft during transportation of goods, here we examine crime more generally. In 2007, 49 percent of surveyed firms in Madagascar categorized crime as a major or very severe obstacle to their business. Referring back to Table 3.1, crime ranks third in the percentage of firms classifying it in either of these categories, behind only electricity and political and regulatory instability. Also in 2007, almost 14 percent of surveyed Malagasy firms ranked crime as the largest obstacle to doing business. As shown in Table 3.2, crime ranked third in the percentage of firms listing it as the largest obstacle to doing business in Madagascar, behind electricity and competitive practices. Figure 3.10 shows the percentage of firms across countries listing crime as either a major or very severe obstacle. Madagascar 2007 is second only to Cote dIvoire, closely followed by Kenya and Madagascar 2004, suggesting that crime may be a relatively large hindrance to enterprise development.
Figure 3.10: Percentage of Firms Categorizing Crime as a Major or Very Severe Obstacle 60% 50% 40% 30% 20% 10% 0%

Figure 3.11 shows the percentage of firms listing crime as the largest obstacle from the list proposed, with Madagascar 2007 second only to South Africa, where the importance of crime as the major constraint to business is substantially higher than in Madagascar. Madagascar 2004 again ranks considerably lower than in 2007, again suggesting a worsening of the security situation for enterprises connected to the current period of political crisis.49

Because of differences in the available choices for Madagascar surveys for 2004 and 2007, comparing the two years may be of limited usefulness. Also, there are no data on largest obstacle for India, Malaysia, Mauritius, or Vietnam.

49

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Figure 3.11: Percentage of Firms Listing Crime as the Largest Obstacle

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

The need to protect themselves from crime imposes a cost on firms. Table 3.6 shows that in 2007, 63 percent of Malagasy firms paid for security.50 The table also shows that, in general, a higher percentage of large firms paid for security relative to other sized firms, and a higher percentage of exporters paid for security relative to non-exporters. As was the case for electricity, this may reflect the potentially greater loss to small and medium firms, or if not, the greater ability to pay of large firms. Nonetheless, 50 percent is a considerable share of micro and small firms that pay for security.
Table 3.6: Percentage of Firms Paying for Security
Micro & small 36% 75% 50% 69% 72% 62% 54% Nonexporter 42% 67% 59% 76% 74% 68% 62%

Overall Cote d'Ivoire Kenya Madagascar2007 South Africa Rwanda Tanzania Uganda 45% 69% 63% 79% 75% 71% 64%

Medium 59% 64% 68% 83% 79% 80% 83%

Large 93% 66% 80% 91% 92% 81% 91%

Exporter 80% 71% 74% 88% 84% 79% 76%

In 2007, Malagasy firms paid a median of 0.45 percent of annual sales for security, versus 0.19 percent in 2004, implying a more than doubling in security costs. As shown in Figure 3.12, Tanzanian and Rwandan firms paid a higher percentage of sales for security, while firms in South Africa and Mauritius paid less than Malagasy firms in 2007 but more than in 2004.

50

The question of whether or not a firm paid for security in the previous year was not included in surveys before 2006.

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Figure 3.12: Percentage of Sales Paid for Security (median) 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00%

This leads to the question: why are these firms paying for security? In 2004, Malagasy firms lost a mean51 of 5 percent of annual sales to theft, robbery, vandalism, and arson, versus 1 percent in 2007, as shown in Figure 3.13.52 This decline in the level of theft could be related to the increase in the costs paid for security.
Figure 3.13: Percentage of Sales Lost Due to Theft, Robbery, Vandalism, or Arson in Previous Year (mean) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

As shown in Table 3.7, for most of these countries, including Madagascar in 2007, large firms experienced higher losses as a percentage of sales than other firm sizes.53 This was also the case for exporters versus non-exporters in most countries, although not in Madagascar, where non-exporters suffered marginally higher losses, possibly related to the higher amount of security paid by exporting firms.
Means were used instead of median because most medians were zero, except for Madagascar 2004 and India. Malaysia 2004 and India had no observations and one observation, respectively, which were equal to zero. Therefore their averages were skewed upwards by the lack of zero observations. 53 The question of whether or not a firm experienced losses due to theft was not included in surveys before 2006.
52 51

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Table 3.7: Percentage of Firms Experiencing Losses from Theft, Robbery, Vandalism, or Arson in Previous Year
Micro & small 21% 31% 20% 36% 20% 22% 24% Nonexporter 23% 37% 30% 43% 19% 30% 23%

Overall Cote d'Ivoire Kenya Madagascar2007 South Africa Rwanda Tanzania Uganda 25% 40% 29% 43% 18% 32% 25%

Medium 28% 39% 34% 47% 15% 43% 21%

Large 52% 53% 37% 49% 15% 43% 47%

Exporter 49% 44% 26% 44% 11% 51% 36%

Crime and Firm Characteristics As above, these crime outcomes can be analyzed econometrically for correlations with firm characteristics. Given that the share of sales spent on security and lost to theft are truncated at zero, a tobit model is used, and the results are given in Tables 3.8 (a) and (b).54 The independent variables are the same as in previous models used above.55 Similarly, we also include interaction terms between firm size, firm size squared, and the exporter dummy and Antananarivo 2004 and 2007, to capture the Antananarivo-specific relationships between the dependent variable and these firm characteristics.56 Table 3.8 (a) reports the results of regressing the percentage of sales spent on security on firm characteristics. Firm size is always statistically significant and positive, while firm size squared is always statistically significant and negative, implying once again a non-linear relationshipthe difference between the shares spent on security by small and medium firms is greater than the difference between medium and large firms. None of the coefficients on export status, sales per worker, or the interaction terms are found to be statistically significant, while location in Antananarivo in 2004 is associated with lower security costs than in other countries, relative to sales. The percentage of sales spent on security is not statistically different between Antananarivo 2004 and Antananarivo 2007, while the coefficients on Antananarivo 2007 versus Kampala, Dar es Salaam, and Nairobi are statistically different from each other for all specifications.

54 55

Reported coefficients are marginal effects. The omitted city-country dummy is Johannesburg, South Africa. 56 As before, we also test whether the coefficients for Antananarivo 2004 and Antananarivo 2007 are statistically different, and whether the coefficient for Antananarivo 2007 is statistically different from the coefficients for Kampala (Uganda), Dar es Salaam (Tanzania), and Nairobi (Kenya). The results of this can be found in Appendix to Chapter 4.

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Table 3.8(a): Percentage of Sales Paid for Security (marginal effects)

A1 ln(Emp) ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07 Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007 Constant N Pseudo-R2 -1.612*** -0.55 -0.488 -1.22 -0.737* -0.44 0.744 -0.76 -3.567*** -0.53 7842 0.009 -4.786*** -0.46 7662 0.004 -1.623*** -0.55 -0.478 -1.22 -0.609 -0.47 0.857 -0.82 -3.560*** -0.54 7662 0.009 1.468*** -0.24 -0.113*** -0.03 A2 1.819*** -0.23 -0.156*** -0.03 0.125 -0.2 -0.15 -0.14 A3 1.458*** -0.25 -0.114*** -0.03 0.126 -0.2 -0.168 -0.15 A4 1.423*** -0.25 -0.111*** -0.03 0.063 -0.21 -0.168 -0.15 0.472 -1.94 0.25 -1.82 -0.071 -0.19 0.034 -0.22 0.785 -1.31 1.076 -1.06 -2.47 -4.31 -0.495 -1.22 -2.399 -3.55 0.833 -0.82 -3.445*** -0.55 7662 0.009

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, South Africa. Other city-countries omitted from the table for space reasons. For full list, see Appendix n?.

Table 3.8 (b) reports the results for the regression on the percentage of sales lost to theft. Firm size is always statistically significant and negative, while firm size squared is always statistically significant and positive, implying that larger firms lose a smaller share of sales to theft, up to a size of approximately 110 workers, after which the share lost increases once again in a U-shaped relationship. That this is the mirror image of results reported above for expenditures on security may be due to the fact that, as shown in Table 3.8 (a), larger firms spent more on security and therefore incurred in lower losses. Notably, the amount lost in Antananarivo firms was considerably lower than in other firms, although also increasing with firm size beyond a certain point, while in Antananarivo in 2007, the tendency was for sales lost to theft to increase with firm size. 68 | P a g e

Table 3.8(b): Percentage of Sales Lost to Theft (marginal effects)

B1 ln(Emp) ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07 Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007 Constant N Pseudo-R2 17.556*** -2.22 17.610*** -5.1 2.063* -1.08 1.736 -1.93 -8.293*** -1.47 5786 0.01 71.501*** -17.55 18.601*** -5.02 -17.433** -8.46 3.047 -1.9 -10.141*** -1.5 5786 0.021 16.858*** -2.12 16.708*** -4.88 2.509** -1.11 2.632 -2.04 -7.839*** -1.43 5587 0.011 -28.346*** -7.92 10.170** -4.35 3.140*** -0.78 -1.110** -0.53 -1.963*** -0.69 0.202** -0.08 B2 -1.606** -0.7 0.171** -0.08 B3 -1.771*** -0.67 0.194** -0.08 -1.143* -0.61 0.978 -2.6 B4 -1.580** -0.68 0.155** -0.08 -1.130* -0.62 0.995 -2.57 -27.501*** -7.65 10.148** -4.64 3.246*** -0.75 -1.108* -0.57 -7.717 -6.67 0.223 -2.65 66.593*** -16.97 16.431*** -4.82 -18.430** -9.05 2.502 -2.02 -7.719*** -1.44 5587 0.013

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, South Africa. Other city-countries omitted from the table for space reasons. For full list, see Appendix n?.

Exporter status is negative and statistically significant, meaning that exporters on average lose a lower percentage to theft. Turning to Antananarivo-specific correlations, the interaction term between firm size and Antananarivo 2004 is statistically significant and negative, and the interaction term between firm size squared and Antananarivo 2004 is significant and positive, implying that smaller firms in Antananarivo in 2004 lost a larger percentage of sales to theft, and that the marginal effect of this was declining in firm size. In 2007, the interaction term between firm size and Antananarivo 2007 was significant and positive, and the interaction term between firm size squared and Antananarivo 2007 was significant and negative. This indicates that for firms in Antananarivo in 2007, larger firms lost a larger percentage to theft, and the marginal effect declined as firm size increased. This result stands in contrast to both Antananarivo 2004 and other countries.

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For regressions on the percentage of sales lost to theft, reported in Table 3.8(b), the coefficients on Antananarivo 2004 and Antananarivo 2007 are always statistically different from each other, as are the coefficients on Antananarivo 2007 vs. Kampala, Dar es Salaam, and Nairobi. Corruption In this section, we explore the impact of corruption on Malagasy enterprises. In 2007, 47 percent of surveyed firms in Madagascar categorized corruption as a major or very severe obstacle. Referring back to Figure 3.1, corruption ranks fourth in terms of the percentage of firms classifying it in either of these categories, behind electricity, political and regulatory instability, and crime. But this high ranking does not correspond to the percentage of firms listing corruption as the largest obstacle to doing business. In 2007, only 3 percent of surveyed Malagasy firms ranked corruption as the largest obstacle to doing business.57 As shown in Figure 3.2, corruption was relatively low on the list, ranking tenth in the percentage of firms listing it as the largest obstacle. Corruption in the form of bribes is a less severe problem in Madagascar than in many of its comparator countries. We use the Graft Index of Firm Transactions (GIFT), as detailed in Gonzlez et al (2007), to analyze the probability that a firm will be asked for an informal gift or bribe when requesting connections to utilities, construction permits, import or operating licenses, or for tax purposes. Overall, the probability that a firm in Madagascar will be asked for an informal gift or a bribe was 7 percent in 2007, lower than in Kenya, Cote dIvoire, Tanzania, and Uganda, but higher than in Rwanda and South Africa.58 This is shown in Figure 3.14.
Figure 3.14: Graft Index of Firm Transactions (GIFT) 35% 30% 25% 20% 15% 10% 5% 0%

Source: Gonzlez et al (2007) and Enterprise Surveys.

In addition, Figure 3.15 shows the probabilities within the different categories for Madagascar in 2007. Table 3.9 details the probability that a firm in a given country will be asked for an informal gift or bribe

57

As is the case with all of the largest obstacle data, answers are mutually exclusive, so if a firm does not choose an obstacle as the largest obstacle to doing business, this only provides information as to its relative, rather than absolute, importance. 58 Madagascar 2004, India, Malaysia, Mauritius, and Vietnam are excluded because of data incomparability.

Probability of being asked for a bribe to complete a transaction

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within the different categories across countries, and we see that in most of the scenarios, the probability of a Malagasy firm being asked for an informal gift or bribe is lower than for most or all of its comparator countries. In most of these, Madagascar ranks relatively low versus its comparator countries, except in the case of water connections. In this categorywhich was also the one in which, at 14 percent, Malagasy firms were most likely to be asked for an informal gift or bribeMadagascar ranked third, behind Kenya and Tanzania.
Figure 3.15: Graft Index of Firm Transactions (GIFT), by categoryMadagascar 2007

Water Connection Electricity Connection Construction Permit Operating License Overall Tax Purposes Import License Telephone Connection

0%

2%

4%

6%

8%

10%

12%

14%

16%

Source: Gonzlez et al (2007) and Enterprise Surveys. Table 3.9: Graft Index of Firm Transactions (GIFT), by category
Electricity Connection 16% 32% 13% 5% 0% 24% 18% Water Connection 7% 33% 14% 4% 17% 6% Telephone Connection 11% 29% 3% 4% 4% 10% 5% Construction Permit 23% 36% 12% 0% 13% 36% 15% Import License 27% 16% 3% 2% 9% 13% 20% Operating License 18% 10% 4% 5% 13% 12% Tax Purposes 20% 33% 6% 4% 7% 15% 14%

Country Cote d'Ivoire Kenya Madagascar2007 South Africa Rwanda Tanzania Uganda

Source: Gonzlez et al (2007) and Enterprise Surveys.

Although Madagascar ranks favorably compared to most of its comparator countries, firms in South Africa and Rwanda have lower probabilities of being asked for bribes or informal gifts. Corruption and Firm Characteristics Table 3.10 summarizes the results of regressions on whether a firm was asked for an informal gift or bribe, using OLS with robust standard errors.59 For both outcomes, only countries with questionnaires

59

Corresponding probit results can be found in Appendix n?. The two sets of results are qualitatively similar.

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from 2006 and later were used, following what was done elsewhere in this section, due to data incompatibility.
Table 3.10: Whether a Firm Was Asked for an Informal Gift or Bribe
A1 ln(Emp) -0.004 -0.02 ln(Emp)^2 0 0 Exporter A2 -0.005 -0.02 0 0 A3 -0.01 -0.02 0 0 0.062*** -0.01 Sales/Worker 0.001 0 ln(Emp)*Antananarivo04 -0.011 -0.13 ln(Emp)*Antananarivo07 0.062 -0.07 ln(Emp)^2*Antananarivo04 0.002 -0.01 ln(Emp)^2*Antananarivo07 -0.009 -0.01 Exporter*Antananarivo04 A4 -0.009 -0.02 -0.001 0 0.065*** -0.02 0.001 0 -0.121 -0.13 0.029 -0.09 0.011 -0.01 -0.004 -0.01 0.035 -0.09 Exporter*Antananarivo07 -0.09 -0.07 Antananarivo 2004 Other Madagascar 2004 0.168*** -0.04 0.038 -0.06 Antananarivo 2007 Other Madagascar 2007 0.067*** -0.02 -0.024 -0.02 Constant 0.069** -0.03 N 5824 0.182 -0.28 0.038 -0.06 -0.021 -0.15 -0.024 -0.02 0.068** -0.03 5824 0.123*** -0.04 0.009 -0.05 0.074*** -0.03 -0.033 -0.02 0.076** -0.03 5633 0.242 0.389 -0.28 0.009 -0.05 0.055 -0.19 -0.033 -0.02 0.072** -0.04 5633 0.242

R2 0.24 0.24 * p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, South Africa.

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We find that firm size and firm size squared are not statistically significant. Whether a firm is an exporter is statistically significant and positively associated with being approached for a bribe across all specifications, and its positive sign indicates that, across all of the countries in the sample, exporters are more likely to be asked for an informal gift or bribe, relative to non-exporters. Additionally, we test whether the coefficient for Antananarivo 2007 is statistically different from the coefficients for Kampala (Uganda), Dar es Salaam (Tanzania), and Nairobi (Kenya). As shown in Appendix to Chapter 4, these coefficients were found to be statistically different from each other in all specifications. Unlike in the electricity, transportation, and crime analyses, we did not test whether the coefficients for Antananarivo 2004 and Antananarivo 2007 are statistically different because we exclude all pre-2006 countries. The above analyses of transaction costs again suggest the importance of firm size. The first analysis finds a positive but non-linear correlation between firm size and the share of sales spent on security. Like electricity generation, this may imply either greater ability to pay, or a greater need to pay given the potential losses associated with less security. The percentage of sales lost to theft has the opposite relationship, with larger firms losing a smaller amount, presumably due to the larger amount spent on their own security. While exporters do not appear to pay any more than other firms, they do suffer less theft as a percentage of sales, perhaps due to the location of many exporters in relatively secure export processing zones.

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References
Amiti, M. and J. Konings. 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, Vol. 97 (5), pp. 1611-1638 (December). Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," Quarterly Journal of Economics, MIT Press, Vol. 122(4), pp. 1351-1408 Byiers, B., J. Rand, F. Tarp, and J. Bentzen. 2009. Credit Demand in Mozambican Manufacturing, Journal of International Development, Vol. 22 (1). Collier, P. and J.W. Gunning. 1999. "Explaining African Economic Performance," Journal of Economic Literature, Vol. 37 (1), pp. 64-111. Dunne, P. and A. Hughes. 1994. "Age, Size, Growth and Survival: UK Companies in the 1980s," Journal of Industrial Economics, Vol. 42 (2). Dunne, T., M.J. Roberts, and L. Samuelson. 1988. "Patterns of Firm Entry and Exit in US Manufacturing Industries, RAND Journal of Economics, Vol. 19 (4). EIU 2008, Madagascar Country Profile 2008, Economist Intelligence Unit London, UK. EIU 2009, Madagascar Country Report September 2008, Economist Intelligence Unit London, UK.EIU 2010, Madagascar Country Report March 2008, Economist Intelligence Unit London, UK. Evans, D.S. 1987. "The Relationship between Firm Growth, Size, And Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Vol. 35 (4), pp. 567-581. Gonzalez, Alvaro S., Ernesto Lopez-Cordova, J. and E. Valladares, Elio 2007. The Incidence of Graft on Developing-Country Firms, Policy Research Working Paper Series, 4394. Hall, B.H. 1987. The Relationship Between Firm Size and Firm growth in the US Manufacturing Sector, Journal of Industrial Economics, Vol. 35 (4). IMF, Direction of Trade (IMF) statistics, available at http://www2.imfstatistics.org/DOT/. Jovanovic, B. 1982. "Selection and the Evolution of Industry," Econometrica, Vol.50 (3), p. 649. Laeven, L., Woodruff, C. 2007. "The Quality of the Legal System, Firm Ownership, and Firm Size," Review of Economics and Statistics, Vol.89 (4), pp. 601-614. Mansfield, E. 1962. "Entry, Gibrats Law, Innovation and the Growth of Firms," American Economic Review, Vol. 52 (5), pp. 1023-1051.

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McPherson, M.A., 1996"Growth of Micro and Small Enterprises in Southern Africa," Journal of Development Economics, Vol. 48, pp. 253-277. Pierre, G., 2008, De Jure Labor Regulations and Actual Investment Climate Constraints, Africa Region Working Paper Series No.118(a), August 2008, available at: http://www.worldbank.org/afr/wps/WPS118a_Madagascar_DeJure_Labor_Regulations_English.pdf Teal, F. 1999. "The Ghanaian Manufacturing Sector 1991-95: Firm Growth, Productivity and Convergence," Journal of Development Studies, Vol. 36 (1), pp. 109-127. Tybout, J. 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do and Why?" Journal of Economic Literature, Vol. 38 (1), pp. 11-44. World Bank, 2005, Madagascar Investment Climate Assessment, Africa Private Sector Group, June 2005. World Bank, World Development Indicators, available at http://data.worldbank.org/data-catalog. World Bank 2009, Madagascar Economic Update reports from September 15, 2009, October 20, 2009, November 21, 2009. World Bank, 2010, Madagascar Economic Update, February 1.

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Appendix to Chapter 2
Table 7 Summary Statistics for Main Cross-Country Regression Variables
Variable VA per worker (US$) Capital Intensity (US$) No. of Employees Average Wage (US$) Unit Labor Costs (share of VA) Annual Firm Growth Rate (%) Exporter (d) Export Share (% of sales) Firm age Uni. Ed'd Manager (d) Years of manager experience Share of skilled labor Multi-plant Firm (d) Foreign Owner Share (d) Public Ltd Co. (d) Private Ltd Co. (d) Sole Proprietorship (d) Partnership (d) Ltd Partnership (d) Other Legal Status (d) Foreign Licence Holder (d) Use e-mail (d) Have a website (d) Share of inputs - domestic (%) Share of inputs - imports (%) Imported inputs (d) Sales bought on credit (% of sales) Share of Working Cap. From Formal Sources (%) Share of land-owned (%) Solicited bribe - taxes (d) Solicited bribe - construction permit (d) Bribes as share of sales (%) Losses due to power outages (% of sales) Share of water which is public (%) Losses due to crime (% of sales outages) Security costs as a share of sales (%) Food (d) Garments (d) Textiles (d) Machinery & Equipment (d) Chemicals (d) Plastics & Rubber (d) Fabricated Metal Products (d) Other Manufacturing (d) Retail (d) Wholesale (d) Construction (d) Other Services (d) Transportation (d) Madagascar2004 (d) Madagascar2007 (d) N 5,045.0 5,790.0 8,198.0 7,633.0 4,832.0 6,371.0 8,435.0 8,435.0 8,301.0 6,340.0 7,009.0 5,752.0 8,142.0 8,435.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 4,760.0 8,336.0 8,310.0 5,060.0 4,252.0 4,252.0 8,155.0 7,477.0 6,817.0 5,123.0 1,158.0 4,172.0 5,669.0 5,421.0 4,970.0 5,732.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 8,512.0 Mean 70,655.0 443,056.9 147.9 47,220.0 0.5 5.3 0.3 16.3 14.6 0.5 11.6 67.5 0.2 0.2 0.0 0.4 0.2 0.2 0.0 0.1 0.1 0.6 0.3 79.1 16.3 0.3 49.9 19.3 30.7 0.3 0.6 3.0 6.2 44.0 73.0 65.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.1 S.D. 5,787.0 40,262.9 42.4 10,052.2 4.0 6.4 0.8 8.1 3.7 0.7 2.8 3.3 0.9 0.9 1.0 0.8 0.9 0.9 1.0 1.0 1.0 0.6 0.8 3.9 8.0 0.9 5.6 6.4 8.1 0.8 0.7 4.5 4.0 7.1 405.3 399.9 0.9 0.9 1.0 1.0 1.0 1.0 1.0 0.9 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Median 10,614.2 9,598.3 27.0 3,240.4 0.3 2.6 0.0 0.0 11.0 0.0 10.0 72.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 100.0 0.0 0.0 50.0 0.0 1.0 0.0 1.0 0.0 2.0 10.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Min. 35,400,000.0 0.1 0.0 0.0 0.0 315.8 0.0 0.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Max. 64,500,000.0 2,030,000,000.0 19,047.0 189,000,000.0 134.3 174.4 1.0 100.0 141.0 1.0 100.0 100.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 100.0 100.0 1.0 100.0 100.0 100.0 1.0 1.0 100.0 100.0 100.0 222,222.2 222,222.2 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

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Kenya (d) Tanzania (d) Rwanda (d) Uganda (d) India (d) Malaysia (d) South Africa (d) Mauritius (d) Vietnam (d) Cote d'Ivoire (d)

8,435.0 8,435.0 8,435.0 8,435.0 8,435.0 8,435.0 8,435.0 8,435.0 8,435.0 8,435.0

0.1 0.0 0.0 0.1 0.3 0.1 0.1 0.0 0.1 0.1

1.0 1.0 1.0 1.0 0.9 0.9 0.9 1.0 0.9 1.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

Note: US$ Figures in 2005 US US$ adjusted per PPP. (d) designates a 1/0 dummy variable.

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Table 88 Pooled OLS Estimation of Madagascar Panel Firm Productivity

(1) 0.679 [0.240]*** -0.060 [0.026]** -0.024 [0.091] 0.105 [0.058]* 0.003 [0.002] 0.106 [0.358] -0.204 [0.458] 0.212 [0.571] 0.400 [0.416] 0.000 [0.000] 0.487 [0.415] 0.081 [0.347] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 1.435 [0.198]*** (2) 0.585 [0.236]** -0.053 [0.025]** -0.007 [0.090] 0.106 [0.058]* 0.003 [0.002] 0.037 [0.389] -0.288 [0.475] 0.160 [0.573] 0.345 [0.451] 0.000 [0.000] 0.448 [0.424] -0.001 [0.387] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 1.258 [0.256]*** -0.005 [0.003] (3) 0.252 [0.289] -0.022 [0.032] 0.017 [0.101] 0.084 [0.061] 0.003 [0.003] 0.245 [0.359] 0.055 [0.457] 0.000 [0.000] 0.369 [0.414] 0.108 [0.542] 0.822 [0.375]** 0.232 [0.307] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 1.128 [0.277]*** -0.006 [0.003]* 0.423 [0.211]** (4) 0.084 [0.335] -0.010 [0.037] 0.028 [0.098] 0.084 [0.059] 0.003 [0.003] 0.164 [0.618] -0.062 [0.690] -0.005 [0.573] 0.216 [0.654] 0.000 [0.000] 0.658 [0.619] 0.217 [0.587] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 1.216 [0.274]*** -0.007 [0.003]* 0.408 [0.213]* 0.103 [0.237] 0.376 [0.229] 162 7.881 0.000

ln(Employees) ln(Empl)^2 ln(Firm Age) ln(Capital per empl.) Foreign Ownership (d) Garments (d) Textiles (d) Mechinery & Equipment (d) Chemicals (d) Plastics & Rubber (d) Fabircated Metal Products (d) OtherMan_d Retail Trade (d) Wholesale Trade (d) Construction (d) Other Services (d) Transport (d) Madagascar 2004 (d) Skilled Employee Share Univerity Edu. Manager (d) Exporter (d) Importer (d) N F P>F

181 11.137 0.000

181 10.609 0.000

163 7.932 0.000

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Table 98 Micro and Informal Enterprises by Sector Labor Productivity 2,185.30 4,914.24 4,916.92 2,350.00 449.91 53.56 1,044.44 9,239.31 7,525.35 3,709.11 3,394.44 799.67 21,034.02 23,266.54 -401.71 1,821.08 Capital Productivity 6.72 0.08 37.18 0.04 0.34 0.02 5.20 0.41 0.27 0.10 134.57 6.00 0.22 11.17 0.00 0.10 Capital Intensity 133.90 63,603.94 3.35 421.79 196,324.20 1,339.03 3,124.40 200.85 16,737.88 1,893.39 51,720.04 113.82 133,903.00 334.76 65,947.24 2,678.06 0.00 56,322.96 Average Wage 60.26 964.10 803.42 0.00 1,124.79 449.91 482.05 1,124.79 535.61 1,365.81 1,606.84 4,552.70 0.00 1,124.79 1,562.20 1,405.98 1,606.84 5

Food Garments Textiles Machinery & Equipment Fabricated Metal Products Other Manufacturing Retail Construction Other Services Chemicals Plastics & Rubber Transportation

Informal Formal Informal Formal Informal Formal Informal Formal Informal Formal Informal Formal Informal Fornal Informal Formal Informal Formal Informal Formal Informal Formal Informal Formal

No. Firms 14 17 2 0 11 4 1 1 4 3 13 20 29 1 2 18 42 2 1

Note: US$ Figures in 2005 US US$ adjusted per PPP

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Appendix to Chapter 3:
Additional Tables

Figure 3.3: Percentage of firms listing electricity as the largest obstacle 80% 70% 60% 50% 40% 30% 20% 10% 0%

Table 3.2: Percentage of firms listing electricity as the largest obstacle by size, export status and generator status Micro & Small 12% 21% 3% 9% 28% 18% 70% 64% NonExporter 12% 21% 3% 12% 30% 14% 73% 67% No generator 11% 21% 4% 15% 20% 36% 71% 75%

Country Madagascar2004 Madagascar2007 Cote d'Ivoire Kenya Rwanda South Africa Tanzania Uganda

Overall 10% 22% 3% 16% 31% 16% 75% 67%

Medium 11% 20% 1% 17% 33% 15% 83% 72%

Large 5% 30% 0% 25% 54% 16% 79% 75%

Exporter 6% 25% 3% 21% 42% 24% 84% 66%

Generator 6% 42% 5% 17% 22% 55% 87% 74%

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In Table 3.3(b), the dependent variable is whether or not electricity is perceived as the largest obstacle to doing business.
Table 3.3(b): Whether a firm lists electricity as the largest obstacle
B1 0.023 -0.01 -0.001 0 B2 0.023 -0.02 -0.001 0 B3 0.026* -0.01 -0.001 0 0.023 -0.02 -0.443** -0.22 B4 0.023 -0.02 -0.001 0 0.029 -0.02 -0.467** -0.22 -0.02 -0.05 -0.04 -0.11 0.001 -0.01 0.005 -0.01 -0.084** -0.03 0.004 -0.07 -0.043 -0.11 0.048 -0.07 0.089 -0.2 0.131** -0.05 0.096*** -0.03 3546 0.324

ln(Emp) ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07 Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007 Constant N R2

-0.029 -0.05 -0.056 -0.09 0.001 0 0.01 -0.01

0.116*** -0.02 0.095 -0.07 0.019 -0.03 0.148*** -0.05 0.095*** -0.03 3780 0.325

-0.02 -0.1 0.095 -0.07 0.069 -0.16 0.148*** -0.05 0.096*** -0.03 3780 0.326

0.126*** -0.02 0.048 -0.07 0.021 -0.03 0.131** -0.05 0.095*** -0.03 3546 0.323

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

Here firm size and its square are only statistically significant in specifications b1, b4, and b5, suggesting correlation (for all countries) between firm size, country dummies, and the interaction terms that is, the relationship between whether or not electricity is seen as a major problem is location-specific. Sales per worker is statistically significant and negative for all of the specifications in which it is included, indicating that firms with higher sales per worker are less likely to list electricity as the largest obstacle. Focusing on Antananarivo-specific relationships, the interaction term between exporter status and Antananarivo 2004 is statistically significant and negative, indicating that exporters in Antananarivo in

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2004 were less likely to list electricity as the largest obstacle, relative to non-exporters and firms outside Antananarivo, perhaps reflecting better electricity supplies in the capital city.
Table 3.3(d): Whether a firm generates greater than or equal to 10% of its own electricity
ln(Emp) D1 0.102*** -0.01 0.007*** 0 D2 0.102*** -0.01 0.007*** 0 D3 0.099*** -0.01 0.007*** 0 0.028*** -0.01 0.006 -0.01 D4 0.101*** -0.01 0.007*** 0 0.030*** -0.01 0.006 -0.01 -0.127** -0.06 -0.032 -0.09 0.011* -0.01 -0.001 -0.01 -0.045** -0.02 -0.004 -0.07 0.289*** -0.11 0.028 -0.04 0.193 -0.18 0.397*** -0.1 0.242*** -0.03 6481 0.175

ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07

-0.094* -0.06 -0.001 -0.08 0.007 -0.01 -0.003 -0.01

Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007

Constant N R2

0.035*** -0.01 0.028 -0.04 0.062** -0.02 0.353*** -0.08 0.232*** -0.03 6697 0.171

0.215** -0.11 0.029 -0.04 0.118 -0.16 0.355*** -0.08 0.238*** -0.03 6697 0.172

0.037*** -0.01 0.027 -0.04 0.057** -0.03 0.395*** -0.1 0.234*** -0.03 6481 0.174

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

With regards losses due to export shipments, the results are reported in Table 3.4(b). In this case, firm size is only statistically significant when export status is not included that is, export status is correlated with export transport losses. None of the interaction terms were found to be statistically significant.60 For regressions on percentages lost of export shipments, the coefficients on Antananarivo 2004 and Antananarivo 2007 are never statistically different from each other, and the coefficients on Antananarivo 2007 vs. Kampala, Dar es Salaam, and Nairobi are statistically different from each other for

60

Also, the interaction term between exporter and Antananarivo 2007 was dropped due to collinearity.

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specifications where interaction terms were not included, and were found to not be statistically different from each other when interaction terms were included.61
B1 1.848** -0.92 -0.102 -0.1 B2 1.668* -0.97 -0.13 -0.11 B3 1.14 -0.87 -0.071 -0.09 2.615*** -0.78 -0.02 -0.35 B4 1.021 -0.9 -0.053 -0.1 2.541*** -0.81 -0.019 -0.35 -0.612 -5.07 15.483 -12.71 0.024 -0.48 -1.825 -1.35 0.713 -3.29

ln(Emp) ln(Emp)^2 Exporter Sales/Worker ln(Emp)*Antananarivo04 ln(Emp)*Antananarivo07 ln(Emp)^2*Antananarivo04 ln(Emp)^2*Antananarivo07 Exporter*Antananarivo04 Exporter*Antananarivo07 Antananarivo 2004 Other Madagascar 2004 Antananarivo 2007 Other Madagascar 2007 Constant N Pseudo-R2

-0.661 -4.64 13.749 -12.22 0.129 -0.45 -1.698 -1.32

7.774*** -1.4 3.406 -4.36 6.579*** -2.2 9.472** -4.46 24.160*** -2.27 3316 0.084

5.544 -11.04 1.642 -4.29 -20.438 -27.13 7.209 -4.44 20.458*** -2.46 3316 0.092

5.604*** -1.48 5.121 -4.31 4.733** -2.13 8.353** -4.21 21.740*** -2.11 3206 0.088

7.482 -11.99 5.053 -4.31 -25.228 -28.92 8.409** -4.21 21.570*** -2.14 3206 0.089

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix. 1[1] Exporter*Antananarivo07 dropped in b6 due to collinearity.

In Table 3.4(d), the results of the regression on the percentage of exports lost to theft, firm size is always statistically significant and positive, indicating that larger firms lost a larger percentage of exports to theft. Firm size squared is statistically significant and negative, indicating that the marginal increase is diminishing as firm size increases (the increase in percentage lost, for small vs. medium firms, is greater than for the increase for medium vs. large firms). The exporter dummy is significant and positive indicating that exporters lost a larger percentage of exports than non-exporters, as would be expected

61

In d6, Antananarivo 2007 was dropped due to collinearity, so these tests could not be performed on that regression.

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in all specifications in which it is included with the exception of the one where interaction terms were included. Indeed, the size and exporter status are likely to be part of the same thing,
Table 3.4(d): Percent of exported shipments lost to theft (marginal effects)
D1 ln(Emp) 7.780*** (2.77) ln(Emp)^2 -0.647** (0.28) Exporter D2 9.857*** (3.19) -0.900*** (0.33) D3 8.462*** (2.96) -0.753** (0.30) 4.322* (2.39) Sales/Worker -20.135 (38.14) ln(Emp)*Antananarivo04 2.803 (10.89) ln(Emp)*Antananarivo07 43.302 (50.45) ln(Emp)^2*Antananarivo04 0.12 (0.97) ln(Emp)^2*Antananarivo07 -7.049 (7.08) Exporter*Antananarivo04
62

D4 9.708*** (3.27) -0.896*** (0.34) 3.099 (2.58) -18.607 (36.68) 2.95 (11.92) 39.645 (50.03) -0.03 (1.06) -6.363 (6.95) 3.069 (6.71)

Exporter*Antananarivo07

-55.202 (88.14)

Antananarivo 2004

-2.988 (3.17)

-21.132 (29.44) -4.77 (7.17) -57.678 (87.70) -72.007 (.) -42.977*** (8.23) 2950 0.139

-1.547 (3.50) -1.119 (7.95) -3.702 (4.36) -73.445 (.) -44.216*** (8.22) 2845 0.131

-18.347 (31.63) -1.202 (7.80)

Other Madagascar 2004

-5.369 (7.35)

Antananarivo 2007

-1.829 (4.03)

Other Madagascar 2007

-72.107 (.)

-72.996 (.) -45.345*** (8.75) 2845 0.137

Constant

-39.430*** (7.49)

N Pseudo-R2 * p<0.10, ** p<0.05, ***p<0.01

2950 0.13

Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

62

Antananarivo 2007 was dropped in d6 because of collinearity.

84 | P a g e

Tests of whether coefficients are equal

Electricity (OLS)
Did the firm list electricity as a "major" or "very severe" obstacle (OLS) A1 degrees of freedo m Antananariv o: 2004 vs 2007 1, 8134 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi 3, 8134 degrees of freedo Prob > F m A2 degrees of freedo Prob > F m A3 degrees of Prob freedo >F m A4

Prob > F

17.35

0.000

1, 8130

0.85

0.357

1, 7760 21.52

0.00 0 1, 7754

0.78

0.378

94.12

0.000

3, 8130

64.52

0.000

3, 7760 87.24

0.00 0 3, 7754

65.66

0.000

Did the firm list electricity as the largest obstacle (OLS) B1 degrees of freedo m Antananariv o: 2004 vs 2007 1, 3761 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi 3, 3761 degrees of freedo Prob > F m B2 degrees of freedo Prob > F m B3 degrees of Prob freedo >F m B4

Prob > F

24.70

0.000

1, 3757

0.23

0.6323

1, 3525 25.23

0.00 0 1, 3519

21.99

0.000

207.53

0.000

3, 3757

165.50

0.000

3, 3525 198.25

0.00 3, 0 33519

165.0

0.000

85 | P a g e

Did the firm generate more than 0% of its own electricity (OLS) C1 degrees of freedo m Antananariv o: 2004 vs 2007 1, 6663 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi 3, 6663 degrees of freedo Prob > F m C2 degrees of freedo Prob > F m C3 degrees of Prob freedo >F m C4

Prob > F

54.49

0.000

1, 6659

1.94

0.163

1, 6445 49.73

0.00 0 1, 6439

0.81

0.368

30.62

0.000

3, 6659

17.70

0.000

3, 6445 27.46

0.00 0 3, 6439

16.83

0.000

Did the firm generate more than 10% of its own electricity (OLS) D1 degrees of freedo m Antananariv o: 2004 vs 2007 1, 6663 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi 3, 6663 degrees of freedo Prob > F m D2 degrees of freedo Prob > F m D3 degrees of Prob freedo >F m D4

Prob > F

14.85

0.000

1, 6659

0.26

0.608

1, 6445 13.17

0.00 0 1, 6439

0.23

0.634

29.32

0.000

3, 6659

11.91

0.000

3, 6445 30.02

0.00 0 3, 6439

12.05

0.000

86 | P a g e

Electricity (probit)
Did the firm list electricity as a "major" or "very severe" obstacle (probit) A1 degrees of freedo Chi m squared Antananariv o: 2004 vs 2007 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi A2 degrees of Prob > freedo Chi chi2 m squared A3 A4

degrees degrees of Chi Prob of Prob > freedo square > freedo Chi chi2 m d chi2 m squared

Prob > chi2

17.25

0.000

0.94

0.333

21.03

0.00 0

0.94

0.332

196.42

0.000

165.92

0.000

0.00 189.66 0

169.38

0.000

Did the firm list electricity as the largest obstacle (probit) B1 degrees of freedo Chi m squared Antananariv o: 2004 vs 2007 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi B2 degrees of Prob > freedo Chi chi2 m squared B3 B4

degrees degrees of Chi Prob of Prob > freedo square > freedo Chi chi2 m d m squared chi2

Prob > chi2

19.73

0.000

0.05

0.816

19.75

0.00 0

0.13

0.718

375.63

0.000

254.42

0.000

0.00 354.42 0

255.30

0.000

87 | P a g e

Did the firm generate more than 0% of its own electricity (probit) C1 degrees of freedo Chi m squared Antananariv o: 2004 vs 2007 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi C2 degrees of Prob > freedo Chi chi2 m squared C3 C4

degrees degrees of Chi Prob of Prob > freedo square > freedo Chi chi2 m d chi2 m squared

Prob > chi2

51.71

0.000

0.20

0.658

47.40

0.00 0

0.20

0.656

72.78

0.000

36.22

0.000

66.86

0.00 0

34.54

0.000

Did the firm generate more than 10% of its own electricity (probit) D1 degrees of freedo Chi m squared Antananariv o: 2004 vs 2007 Antananariv o 2007 vs: Kampala, Dar es Salaam, Nairobi D2 degrees of Prob > freedo Chi chi2 m squared D3 D4

degrees degrees of Chi Prob of Prob > freedo square > freedo Chi chi2 m d chi2 m squared

Prob > chi2

15.13

0.001

0.67

0.414

13.14

0.00 0

0.16

0.693

72.49

0.000

37.33

0.000

73.13

0.00 0

38.81

0.000

88 | P a g e

Transport (tobit)
Percentage of domestic shipments lost to breakage or spoilage (tobit) A1 A2 degrees of Prob > F freedom A3 A4 degrees Prob > of F freedom F Prob > F

degrees of freedom Antananarivo: 2004 vs 2007 Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

Prob > F

degrees of freedom

1, 4257

4.06

0.044

1, 4253

0.31 0.577 1, 4080 5.09 0.024 1, 4074 0.10 0.748

3, 4257

2.43

0.064

3, 4253

2.32 0.073 3, 4080 2.52 0.056 3, 4074 2.39 0.067

Percentage of exported shipments lost to breakage or spoilage (tobit) B1 B2 degrees of Prob > F freedom B3 B4 degrees Prob > of F freedom F Prob > F

degrees of freedom Antananarivo: 2004 vs 2007 Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

Prob > F

degrees of freedom

1, 3298

0.23

0.634

1, 3288

0.80 0.372 1, 3186 0.12 0.729 1, 3181 1.10 0.295

3, 3298

3.74

0.011

3, 3288

0.58 0.628 3, 3186 4.84 0.002 3, 3181 0.71 0.546

Percentage of domestic shipments lost to theft (tobit) C1 degrees of freedom degrees of freedom C2 C3 C4 Prob > degrees F Prob > F F of

Prob > F

Prob > F degrees of

89 | P a g e

freedom

freedom

Antananarivo: 2004 vs 2007 Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

1, 4483

20.45

0.000

1, 4479

0.74 0.390 1, 4309 19.03 0.000 1, 4303 0.08 0.783

3, 4483

6.54

0.000

3, 4479

6.70 0.000 3, 4309 6.55 0.000 3, 4303 6.64 0.000

Percentage of exported shipments lost to theft (tobit) D1 D2 degrees of Prob > F freedom D3 D4
63

degrees of freedom Antananarivo: 2004 vs 2007 Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

Prob > F

degrees of freedom

degrees Prob > of F freedom F Prob > F

1, 2917

0.08

0.773

1, 2913

0.16 0.691 1, 2810 0.22 0.637

3, 2917

2.98

0.030

3, 2913

1.32 0.265 3, 2810 3.11 0.025

Crime (tobit)
Percentage of sales paid for security (tobit) A1 A2 degrees of Prob > F freedom A3 degrees Prob > of F freedom A4

degrees of freedom Antananarivo: 2004 vs 2007 Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

degrees of Prob > F freedom

Prob > F

1, 7809

1.82

0.177

1, 7805

0.15

0.695 1, 7627

2.29

0.131 1, 7621 0.00 0.990

3, 7809

6.87

0.000

3, 7805

5.84

0.000 3, 7627

6.52

0.000 3, 7621 5.98 0.000

63

Antananarivo 2007 was dropped from this regression due to collinearity

90 | P a g e

Percentage of sales lost to theft (tobit) B1 B2 degrees of Prob > F freedom B3 degrees Prob > of F freedom B4

degrees of freedom Antananarivo: 2004 vs 2007 Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

degrees of Prob > F freedom

Prob > F

1, 5768

41.36 0.000

1, 5758

21.07 0.000 1, 5567 37.65

0.000 1, 5561 19.74 0.000

3, 5768

9.69

0.000

3, 5758

11.43 0.000 3, 5567 10.30

0.000 3, 5561 12.35 0.000

Corruption (OLS)
Was the firm asked for an informal gift or bribe (OLS) A1 degrees of Prob > F freedom A2 degrees of Prob > F freedom A3 degrees Prob > of F freedom A4

degrees of freedom Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

Prob > F

3, 5790

33.91

0.000

3, 5786 23.43

0.000 3, 5597 29.06 0.000 3, 5591 20.39

0.000

91 | P a g e

Corruption (Probit)
Was the firm asked for an informal gift or bribe (probit) A1 A2 A3 A4

degrees degrees of Chi Prob > of Chi freedom squared chi2 freedom squared Antananarivo 2007 vs: Kampala, Dar es Salaam, Nairobi

degree degrees Chi Prob s of Prob > of square > freedo Chi chi2 freedom chi2 m squared d

Prob > chi2

101.50

0.000

73.10

0.000

87.54

0.00 0

64.16

0.000

92 | P a g e

City-country dummies included in the regressions:64 65

Abidjan, Cote d'Ivoire Other, Cote d'Ivoire Kolkatta, India Jaipur, India Hyderabad, India Delhi, India Coimbatore, India Other, India Nairobi, Kenya Other, Kenya Antananarivo, Madagascar 2004 Other, Madagascar 2004 Antananarivo, Madagascar 2007 Other, Madagascar 2007 Port Louis, Mauritius Macoas, Mauritius Other, Mauritius Johannesburg, South Africa (omitted) Cape Town, South Africa Other, South Africa Kigali, Rwanda Other, Rwanda Dar es Salaam, Tanzania Other, Tanzania Kampala, Uganda Other, Uganda Ho Chi Minh City, Vietnam Hanoi, Vietnam Hai Phong, Vietnam Thanh Hoa, Vietnam Bien Hoa, Vietnam Other, Vietnam

64 65

Not all countries are included in all regressions, depending on data availability ( detailed in the text) Malaysia was excluded, because it did not include data on the location (city or region) of each firm.

93 | P a g e

Additional econometric results

Probit (marginal effects): Electricity ( % sales lost to power outages)66

A1 Madagascar 2004 0.122*** -0.01 Madagascar 2007 0.135*** -0.01 Cote d'Ivoire 0.170*** -0.01 India 0.266*** -0.01 Kenya 0.191*** -0.01 Mauritius 0.024 -0.03 Rwanda 0.157*** -0.01 South Africa 0.141*** -0.01 Tanzania 0.177*** -0.01 Uganda 0.185*** -0.01 Vietnam 0.083*** -0.01 N Pseudo-R2 * p<0.10, ** p<0.05, ***p<0.01 Omitted country: Malaysia test for whether coefficient on Madagascar 2004 is equal to the coefficient on Madagascar 2007: Chi2 = 0.69 Prob > Chi2 = 0.4065 5876 0.138

66

Only tested for the purpose of determining the statistical difference between Madagascar 2004 and Madagascar 2007.

94 | P a g e

Probit (marginal effects): Electricity

Electricity is perceived as a major or very severe obstacle

A1 ln(Emp) 0.031* (0.02) ln(Emp)^2 -0.002 (0.00) Exporter A2 0.043** (0.02) -0.003 (0.00) A3 0.022 (0.02) -0.001 (0.00) 0.031** (0.02) Sales/Worker 0.003 (0.01) ln(Emp)*Antananarivo04 -0.344*** (0.12) ln(Emp)*Antananarivo07 -0.09 (0.11) ln(Emp)^2*Antananarivo04 0.038*** (0.01) ln(Emp)^2*Antananarivo07 0.009 (0.01) Exporter*Antananarivo04 A4 0.035** (0.02) -0.002 (0.00) 0.028* (0.02) 0.003 (0.01) -0.401*** (0.14) -0.092 (0.12) 0.043*** (0.01) 0.005 (0.02) -0.004 (0.09) Exporter*Antananarivo07 0.077 (0.08) Antananarivo 2004 0.240*** (0.04) Other Madagascar 2004 0.331*** (0.07) Antananarivo 2007 0.399*** (0.02) Other Madagascar 2007 0.528*** (0.03) N Pseudo-R2 8151 0.19 0.630*** (0.04) 0.331*** (0.07) 0.533*** (0.11) 0.528*** (0.03) 8151 0.191 0.225*** (0.04) 0.331*** (0.08) 0.418*** (0.03) 0.541*** (0.03) 7784 0.187 0.644*** (0.03) 0.330*** (0.08) 0.565*** (0.10) 0.541*** (0.03) 7784 0.189

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

95 | P a g e

Electricity is perceived as the largest obstacle

B1 ln(Emp) 0.035 (0.02) ln(Emp)^2 -0.002 (0.00) Exporter B2 0.037 (0.03) -0.002 (0.00) B3 0.038 (0.02) -0.002 (0.00) 0.03 (0.02) Sales/Worker -0.919 (0.65) ln(Emp)*Antananarivo04 -0.053 (0.15) ln(Emp)*Antananarivo07 -0.047 (0.10) ln(Emp)^2*Antananarivo04 0.003 (0.02) ln(Emp)^2*Antananarivo07 0.009 (0.01) Exporter*Antananarivo04 B4 0.038 (0.03) -0.002 (0.00) 0.037 (0.03) -0.954 (0.66) -0.061 (0.17) -0.046 (0.11) 0.008 (0.02) 0.006 (0.01) -0.164** (0.07) Exporter*Antananarivo07 -0.003 (0.07) Antananarivo 2004 -0.153*** (0.03) Other Madagascar 2004 0.113 (0.08) Antananarivo 2007 0.021 (0.03) Other Madagascar 2007 0.175*** (0.06) N Pseudo-R2 3738 0.275 -0.034 (0.31) 0.113 (0.08) 0.057 (0.22) 0.174*** (0.06) 3738 0.276 -0.164*** (0.03) 0.06 (0.09) 0.022 (0.03) 0.149** (0.06) 3507 0.276 -0.047 (0.34) 0.061 (0.09) 0.116 (0.26) 0.149** (0.06) 3507 0.277

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

96 | P a g e

Greater than 0% of electricity is self-generated

C1 ln(Emp) 0.261*** (0.02) ln(Emp)^2 -0.016*** (0.00) Exporter C2 0.262*** (0.02) -0.016*** (0.00) C3 0.250*** (0.02) -0.016*** (0.00) 0.101*** (0.02) Sales/Worker 0.012 (0.01) ln(Emp)*Antananarivo04 -0.255 (0.18) ln(Emp)*Antananarivo07 0.045 (0.16) ln(Emp)^2*Antananarivo04 0.021 (0.02) ln(Emp)^2*Antananarivo07 -0.008 (0.02) Exporter*Antananarivo04 C4 0.254*** (0.02) -0.016*** (0.00) 0.105*** (0.02) 0.012 (0.01) -0.366* (0.20) -0.066 (0.17) 0.034* (0.02) 0.005 (0.02) -0.154 (0.11) Exporter*Antananarivo07 -0.039 (0.09) Antananarivo 2004 Other Madagascar 2004 -0.248*** (0.02) -0.180*** (0.06) Antananarivo 2007 Other Madagascar 2007 0.132*** (0.05) 0.455*** (0.07) N Pseudo-R2 6697 0.207 0.349 (0.45) -0.181*** (0.06) 0.087 (0.36) 0.456*** (0.07) 6697 0.207 -0.250*** (0.02) -0.171** (0.08) 0.160*** (0.05) 0.526*** (0.07) 6481 0.21 0.578** (0.28) -0.170** (0.08) 0.365 (0.35) 0.528*** (0.06) 6481 0.21

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

Greater than or equal to 10% of electricity is self-generated

97 | P a g e

D1 ln(Emp) 0.082*** (0.01) ln(Emp)^2 -0.005*** (0.00) Exporter

D2 0.081*** (0.01) -0.005*** (0.00)

D3 0.077*** (0.01) -0.005*** (0.00) 0.026** (0.01)

D4 0.078*** (0.01) -0.005*** (0.00) 0.026** (0.01) 0.004 (0.01) -0.044 (0.20) 0.006 (0.11) 0.008 (0.02) -0.005 (0.01) -0.092** (0.04)

Sales/Worker

0.004 (0.01)

ln(Emp)*Antananarivo04

0.087 (0.17)

ln(Emp)*Antananarivo07

0.037 (0.10)

ln(Emp)^2*Antananarivo04

-0.007 (0.01)

ln(Emp)^2*Antananarivo07

-0.007 (0.01)

Exporter*Antananarivo04

Exporter*Antananarivo07

0.003 (0.06)

Antananarivo 2004 Other Madagascar 2004

-0.069*** (0.02) 0.045 (0.07)

-0.118*** (0.02) 0.045 (0.07) 0.072 (0.30) 0.520*** (0.09) 6680 0.203

-0.086*** (0.02) 0.045 (0.08) 0.099** (0.04) 0.564*** (0.10) 6422 0.204

-0.069 (0.27) 0.046 (0.08) 0.199 (0.42) 0.565*** (0.10) 6422 0.205

Antananarivo 2007 Other Madagascar 2007

0.109** (0.04) 0.521*** (0.09)

N Pseudo-R2

6680 0.202

* p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

Probit (marginal effects): Corruption Whether a firm was asked for an informal gift or bribe 98 | P a g e

A1 ln(Emp) -0.004 (0.02) ln(Emp)^2 0.000 (0.00) Exporter

A2 -0.005 (0.02) 0.000 (0.00)

A3 -0.011 (0.02) -0.001 (0.00) 0.076*** (0.02)

A4 -0.009 (0.02) -0.001 -0.0001 0.078*** -0.02 0.001 -0.01 -0.193 -0.19 0.112 -0.22 0.017 -0.02 -0.017 -0.03 0.082 -0.14

Sales/Worker

0.001 (0.01)

ln(Emp)*Antananarivo04

-0.016 (0.16)

ln(Emp)*Antananarivo07

0.194 (0.21)

ln(Emp)^2*Antananarivo04

0.002 (0.02)

ln(Emp)^2*Antananarivo07

-0.029 (0.03)

Exporter*Antananarivo04

Exporter*Antananarivo07

-0.123 -0.1

Antananarivo 2004

0.335*** (0.06)

0.356 (0.33) 0.113 (0.15) -0.106 (0.34) -0.093 (0.10) 5824

0.274*** (0.07) 0.022 (0.18) 0.191*** (0.06) -0.154 (0.12) 5633 0.203

0.588*** -0.17 0.022 -0.18 0.06 -0.44 -0.154 -0.12 5633 0.203

Other Madagascar 2004

0.113 (0.15)

Antananarivo 2007

0.177*** (0.06)

Other Madagascar 2007

-0.093 (0.10)

5824

Pseudo-R2 0.201 0.201 * p<0.10, ** p<0.05, ***p<0.01 Omitted city-country: Johannesburg, SA Other city-countries omitted from the table for space reasons. For full list, see Appendix.

99 | P a g e