The Center for Latin American Issues Working Paper Series HOW POLITICAL ENVIRONMENTS AFFECT THE GROWTH OF FIRMS: EVIDENCE FROM SMALL AND LARGE ENTERPRISES IN LATIN AMERICA

This paper used data from firms operating in twenty Latin American countries to evaluate whether firms’ perceptions about the nature and predictability of governments’ regulatory policies, the prevalence of intervention in the domestic economy, and the degree to which corruption served as an obstacle to business activity influenced firms’ growth. The paper also tested whether firms’ size or multinationality influenced managers’ perceptions concerning whether the political environment posed serious obstacles to their business strategies and performance. Our empirical analysis showed that the presence of major regulatory obstacles, government market intervention, and extensive corruption were associated with lower sales growth among firms operating in a country. In addition, the predictability of a government’s policy agenda appeared to be as important to firm performance as the specific regulatory policies that were in place at a given point in time. Moreover, countries’ political environments had a differential effect on small firms and larger firms. Both business regulations and extensive market intervention appeared to pose greater obstacles for larger firms than smaller ones. In contrast, small firms reported more substantial obstacles stemming from political corruption than their larger rivals. Finally, a country’s political environment appeared to have a differential impact on foreign and domestic firms. Foreign firms perceived government policies as more predictable, and perceived fewer obstacles related to domestic political corruption than did domestic firms.