The Effect of Local Governance on Firm Productivity and Resource Allocation

Abstract

Governance quality plays a key role in private sector development: competent bureaucrats not only create good policies and regulations, but also effectively implement them to shape the business environment. This paper exploit Vietnam’s decentralization of administrative tasks since the early 2000s to test this hypothesis. The paper examines how changes in the provincial administration of national business regulations affect firms through two channels: within-firm productivity levels and resource allocation across firms. The results show that better overall business environment has a positive impact on firm productivity, and this effect is driven by a reduction in corruption levels, the risks of land expropriation, and entry regulations. The analysis also finds that high-productivity firms are generally better able to take advantage of improvements in the business environment. However, better implementation of entry regulations matters most for less productive firms. The study does not find evidence for the impact of business environment quality on province-level market efficiency.