The effect of business enabling policies, tax treatment, corruption and political connections on business climate

Abstract

The impact of the institutional environment on the business activity was a subject of several previous studies. However, the ways in which changes in institutions affect business climate have not received proper attention from scholars as of yet. The purpose of this paper is to fill this gap in the literature by examining the relationship between selected formal institutions (business enabling policies and tax treatment) and informal institutions (corruption and political connections) and business climate in the context of the developing country. To test the proposed hypotheses an ordinal regression with two link functions was applied on an original dataset of 404 firms operating in Albania. Results show that neither formal institutions, nor informal ones act as a block concerning the impact on the business climate. Tax treatment and political connections affected business climate negatively, whereas corruption seemed to have a positive impact. A positive but insignificant effect was found between business enabling policies and the business climate. Our research triggers interest of policymakers who intend to design policies to improve the business environment.