CHAPTER 4
Figure A4.1: Correspondence between product market regulation indicator and principal components analysis index
Product market regulation indicator (2008) Source: World Bank staff calculations, based on Doing Business and OECD (2011).
the improvements achieved over the period.55 The Doing Business principal components analyses are highly correlated with the country ranking provided by Doing Business. For example, the correlation between the comprehensive principal components analysis index and the overall rank in Doing Business 2010 was –0.91, using all 150 countries for which both variables are available.56 Given that the principal components analysis is built on the basis of the indicators, they share methodological limitations.57 To verify the quality of the principal components analysis indicator, we compare it with alternative measures of the quality of business regulation. The chapter utilizes what is considered a well-regarded methodology, the Product Market Regulation indicators constructed by the Organisation for Economic Co-operation and Development (OECD 2011). The analysis indicates that the two indicators are similar proxies of the quality of the business environment: the correlation between the comprehensive principal components analysis index of Doing Business indicators and the economywide Product Market Regulation indicator is very high: –0.74, using Doing Business 2008 data for the 39 countries for which both indicators are available (figure A4.1). But one of the advantages of the Doing Business indicators is their availability for a comprehensive set of countries and on a yearly basis.58 When analyzing the effects of business regulation on firm performance based on the Amadeus panel of incumbent firms, the last two principal components analysis indices—on business operations and institutional environment—are used. For these companies that managed to survive over the period, entry and exit regulation tend to matter less. For other types of analysis, especially when using country-level data from Eurostat, the principal components analysis of overall business regulation and also the three combined indices are considered.
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