Policy Uncertainty in Hybrid Regimes: Evidence From Firm-Level Surveys

Abstract

Cross-national surveys suggest that regulatory and policy uncertainty is an important constraint on investment in developing countries. Yet there has been little direct empirical investigation of the sources of this uncertainty. This article presents evidence of an inverted U-shaped relationship between firms’ perceptions of policy uncertainty and political regime type. Firms in hybrid regimes report higher levels of concern over policy uncertainty than those in either more authoritarian regimes or liberal established democracies. The authors argue that the explanation lies with a combination of polarized political competition and limited access to credible information and test their theory using survey data of around 10,000 firms from the World Bank—European Bank for Reconstruction and Development’s Business Environment and Enterprise Performance Survey from 27 postcommunist countries and five Organisation for Economic Co-operation and Development countries. Methodologically, the authors propose a means of controlling for reporting and suppression biases in these surveys when an anchoring vignette is not available.