| Abstract: |
Although it had a a lower income level than India in 1980, China's 2006 per
capita gross domestic product stands more than twice that of India's. This
paper investigates the role of the business environment in explaining China's
productivity advantage using recent firm-level survey data. The analysis finds
that China has better infrastructure, more skilled workers, and more
labor-hiring flexibility than India, but a worse access to finance and higher
regulatory burden. Infrastructure appears to be a key constraint for India: it
lags significantly behind China, yet it has important indirect effects for the
effectiveness of labor flexibility. Labor flexibility is also likely a major
constraint for India, as evident in the predominance of small firms, the
importance of firm size in accounting for India's disadvantage in
productivity, and the complementarity of proxies of labor flexibility with
infrastructure and access to finance. Interestingly, regulatory uncertainty
has adverse effects in India but not in China. The empirical analysis suggests
that it is important to consider country-specific growth bottlenecks and the
indirect effects of policy reforms. |