The impact of investment climate indicators on ownership and firm performance: evidence from different stone mines in Bangladesh

Abstract

Investment in stone mining projects is always associated with risks as there might have relatively greater uncertainty of expected level of extraction. This study examines the degree to which firms operating in stone mines are facing risks and obstacles regarding their investment and profit, conditional on the investment climate indicators, ownership structure, and firm’s performance. Studies on investment climate are mainly based on macro level data, and firm level studies are relatively sparse (Dao, 2008; Cull and Xu, 2003; 2005). This sparseness may result from the dearth of micro-level data. This study provides findings that also fill-up this gap in the literature. The analyses are based on data collected in 2010 and 2011 and from 633 small, medium and large stone mining firms from Sylhet Division in Bangladesh. 112 of large firms reported that the source of their initial investment came from either bank loan or remittances or both, while in case of medium firm partnership between mine owners and individual investor who bears the mine digging and extraction costs played the dominant role (73 out of 209). However, 49.49 % of the small firms reported that either usury or microfinance through NGOs were the major source of their initial investment. The estimates obtained from ordered probit and IV-ordered probit models show that most sets of variables have statistically significant impacts on ownership and firm performance. Our findings suggest that factors like credit facilities, red tape captured by delay, regulatory burden, weak infrastructure, illegal payments such as bribe paid to the public officials, and acute labour shortages are responsible for changes in production and cost; and thus in investment climate. As property rights are defined and ownership structures are fully explored, the stone crashing firms are relatively risk free. In case of small and medium firms, firm’s location plays an important role. Experience matters for large firms. With the finding that acute labor shortages is a significant bar to profitable investment climate, large scale labour migration from less developed parts of the country to the mining areas would be one of the best feasible solutions. Bribe or illegal payment made by firms should be mitigated through increasing level of inspections by the administration. Our result accounts for the heterogeneity of firms and may be important for policy makers to develop clear, consistent and unambiguous approaches to fostering a favourable investment climate for firms under consideration especially for small firms.