ESSAYS ON BUSINESS ENVIRONMENT AND FIRM PERFORMANCE

Firm performance is central to economic growth of developing economies. However, it is affected by the business environments in which a firm operates. These business environments includes: features of legal and regulatory services, infrastructures, financial and institutional systems of the country. A burgeoning literature within development economics seeks to understand the constraints that a firm face and strategies to cope with these problems. However, a rigorous empirical study that informs policy makers and concerned development institutions is still lacking especially in Sub-Sahara African countries where the problem is severe. Thus, this thesis focused on examining the impact of business environment on firm performance and how firms respond to poor business environment. The study mainly focused on examining the impact of poor electricity supply, its economic cost and how firms responds to a poor power supply. The thesis is organized in two chapters. The first chapter “power outages, economic cost and firm performance: Evidence from Ethiopia”deals with how firms in Ethiopia respond to power interruptions and estimating the economic cost of power outages using two rounds of firm-level survey data. The study employed the World Bank Enterprise Survey (WBES) data collected from firms operating in Ethiopia during 2011 and 2015. The result shows that firms in Ethiopia self-generate electricity in response to power outages. Power outages were found to affect firms’ productivity negatively, increasing firms’ costs by 15% from 2011 to 2015. This effect varied negatively with output level, suggesting that power outages is particularly costly for small firms. This chapter is a single authored paper and published in the Journal of Utilities Policy (53) 111-120. The article can be accessed from: https://doi.org/10.1016/j.jup.2018.06.009. The second chapter “firm performance under infrastructure constraint: evidence from Sub-Saharan African firms” deals with the role of investment in self-generation in mitigating outage loss and evaluating the outage loss differential between firms that invested in self-generation and those that didn't. Using the WBES data collected from firms operating in 13 Sub-Saharan African countries, the study provided an evidence that though self-generation has helped firms reduce outage loss, firms that have invested in self-generation continue to face higher unmitigated outage loss compared to firms without such investment. In spite of this, firms that have invested in self-generation would have incurred 36%-99% more than their current outage loss if they didn't engage in self-generation while firms that didn't invest in self-generation would have reduced their outage loss by 2% - 24% if they had engaged in self generation. This chapter is also a single-authored paper. Given the above result, the study proposed a differential supply interruption to be followed by public authorities based on firms' degree of vulnerability. Stating differently, firms whose operation are more vulnerable to power outages should get preferential power supply advantage. This could be possible by arranging a binding contract between a vulnerable firms and power companies, so that power companies charge an optimal tariff for supplying secure power for vulnerable firms. In turn, firms should be compensated if the power companies fail to do so. This helps vulnerable firms expand their production without fearing the risk of power outage.