Pakistan's Investment Climate : Laying the Foundation for Renewed Growth, Volume 3. Background Paper on Econometric Methods (original) (raw)

In this paper we describe the econometric methodology applied in searching for empirical regularities on the investment climate (IC) effects and on the economic performance of Pakistan firms. We use firm level data coming from the investment climate surveys (ICSs) of Pakistanmanufactures and services-for 2007 and 2002. For identification of the main IC effects on economic performance we follow the robust productivity methodology developed in Escribano and Guasch (2005 and 2008) and Escribano et al (2008b). Once we have robust IC elasticities and semielasticities on productivity and on other economic performance measres, we follow Escribano, et al, (2008a) and Escribano, Guasch and Pena, (2008) for the evaluation of the impact of the IC variables in terms of the Olley and Pakes (1996) decomposition of aggregate productivity and in terms of the sample means of alternative economic performance measures (employment, wages, probability of exporting and probability of receiving FDI). This econometric methodology has been widely used in the ICA of many other countries, allowing us to do cross country demeaned productivity comparisons. Furthermore, it also allow us to estimate robust IC productivity effects controlling for endogeneity and observable fixed effects while having certain simultaneity among covariates, missing observations and measurement errors.