Business climate and firm exit in developing countries: evidence from Nigeria

Abstract

AbstractThe business environment goes a long way to influence firm performance through several channels such as government policies and regulations, institutions, infrastructure, and macroeconomic variations. With developing countries known for having the most deteriorating business climate, this study set out to answer the question: "Does business climate account for firm exit in developing countries?" Using a comprehensive dataset of panel firms from the World Bank Enterprise Survey in Nigeria, the study aggregates 15 firm-level constraint variables into a composite index and estimates the likelihood of firm exit using the binary probit model. The results from the analysis infer that the unconducive state of the business climate in Nigeria significantly impedes firms’ prospects for survival. More specifically, the estimated probability of exiting the market is predicted to grow by 11% points for every additional increase in the constraint index. The recommendation follows that efforts should be geared toward improving the state of the business climate in Nigeria through carefully designed policies that can foster private sector development. Such policies should among others increase government investment in critical infrastructure, eliminate destructive tax policies, and maintain a healthy macroeconomic environment, which by implication, go a long way to improve business longevity and contributes to national development.