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1. Introduction Most economists agree that sustained economic growth is the most critical factor in alleviating poverty.1 There is also a general consensus among the development community that the private sector is an engine of economic growth. Investment Climate (IC) reforms, which seek to improve the overall and firm-level business enabling environment, are an essential component of private sector development. They also contribute to productivity and investment, which are key determinants of growth.2 Poverty definitions vary among scholars and institutions. Using the standard World Bank USD 1.25 a day measure,3 1.29 billion people classified as poor in 2008. According to the economic bottom of the pyramid (BOP) concept, which refers to low-income markets where people have a yearly income below USD 3,000,4 4 billion people classify as poor.5 BOP markets are present in all developing regions. Most are poor, rural and poorly served. However, they constitute a USD 5 trillion global consumer market,6 presenting a business opportunity for local and foreign businesses. Their operating and regulatory environments can be challenging, and as a result, they are relatively inefficient, uncompetitive and dominated by informal economy.7 IC reforms address the needs of the poor by facilitating enterprise creation and growth, fostering international trade and investment, promoting sustainable investments in key industries (agribusiness, tourism) and encouraging private participation in infrastructure and social sectors (ICT and health). IC reforms focus on micro, small and medium sized enterprises and reach the poorest regions of the world. As the chart below shows, the Investment Climate Department (CIC) invests 31% of its funding in Sub-Saharan Africa, where 47.5% of the population classifies as poor by the USD 1.25 a day measure8 and 95% of the population constitutes a BOP market. Sub-Saharan Africa is followed by the Asian regions,9 which cumulatively receive 32% of CIC funding. Together with the Middle East, Asia represents the largest, most growing and rural BOP market in the world.10 Chart 1: CIC FY12 projects and project expenditures by region11 Projects in regions (active/on hold) World LAC 8 EAP 23 17 SSA 45 SA 17 MENA 18 ECA 22 Project expenditures in regions LAC 8% World EAP 15% 11% SSA 31% SA 14% MENA 7% ECA 14% 1 Nallari R., Griffith B.. 2011. Understanding Growth and Poverty Theory, Policy, and Empirics. The World Bank. World Development Report 2005. A Better Investment Climate for Everyone. The World Bank and Oxford University Press (WDR 2005). 3 Refers to international dollars (adjusted for purchasing power parity (PPP)) at 2005 international prices (Source: PovcalNet database, World Bank Data, 2012). 4 In 2005 international dollars, adjusted for PPP (Source: The Next 4 Billion, 2007). 5 Hammond A., Kramer W. J., Tran J., Rob Katz, Walker C. 2007. The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. World Resource Institute. (The Next 4 Billion, 2007) 6 Id. 7 The Next 4 Billion, 2007. 8 In 2005 international dollars, adjusted for PPP (Source: PovcalNet, World Bank Data, 2012). 9 Includes East Asia and Pacific (EAP), South Asia (SA) and Middle East and North Africa (MENA). The percentage would be even higher if Asian countries from the Europe and Central Asia region were accounted for. 10 The Next 4 Billion, 2007. 11 Status as of March 31, 2012. 2 1 During the 2008-2011 strategy cycle, CIC-funded projects supported the implementation of 186 IC reforms (USD 119.8 million were spent on CIC-related activities)12. Business entry has been the most frequent reform area, seeking to include the BOP in the formal economy in order to spur their growth and wealth generation. The following two sections will review the impact of IC reforms and their link with poverty reduction. Findings include theoretical and empirical studies, country and cross-country studies and descriptive reports. 2. The Impact of Investment Climate Reforms Entrepreneurship is indispensable for sustaining the dynamism of the modern market economy, and a greater entry rate of new businesses can foster competition and economic growth.13 In order to facilitate a healthy process of creative destruction, a conducive business environment is needed. First, firms should be able to enter the market easily. Second, the market should be highly competitive, in order to inspire and encourage innovation. Third, business exit process should be quick and efficient, to allow creditors to recover their assets and entrepreneurs to pursue new opportunities. Chart 2: IC Reforms and Poverty Reduction IC Strategic Priorities IC Reform Areas Business Regulations Debt Resolution and Fostering Enterprise Creation and Growth Business Taxation Unlocking Sustainable Investment in Key Sectors Investment Policy Productivity Investment Generated (domestic or FDI) Jobs Private Participation in Health Sector Private Sector Savings - Competition Policy - ICT - Governance/Transparency - Gender/Inclusion - PPD - Green Growth Economic Growth is Closely Associated with Reductions in Poverty Returns to Creditors Consumer Savings Cross-cutting Themes: Encouraging Private Participation in Infrastructure and Social sectors (Health and ICT) Aggregate Level Firm Creation Industry: Agribusiness and Tourism Private Participation in Electricity Sector Impact on Poverty Reduction Export Business Exit Trade Logistics Facilitating International Trade and Investment IC Impact Indicators Direct Improvements in Lives of the Poor Employees Entrepreneurs Consumers Users of Infrastructure and Finance Improved Infrastructure Reduction in Corruption 12 FY08-10: USD 89.5 million, FY11: USD 30.3 million (Source: 2011 Annual Review. FIAS: The Facility for Investment Climate Advisory Services. The World Bank Group) 13 Klapper, L., Laeven L., Rajan R.. 2006. Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics 82 (3): 591– 629. Djankov, S., La Porta R., Lopez- de- Silanes F., Shleifer A.. 2002. The regulation of entry. Quarterly Journal of Economics 117 (1): 1– 35. 2 IC reforms cover the following topics: Business entry reforms have a positive impact on firm creation. Country-specific studies from Colombia, Mexico and India, as well cross-country studies, show that easing of business registration leads to higher firm creation. The average increase in the entry rate is 5% for selected country studies and 10.5% for cross-country studies.14 A large share of newly registered firms tends to survive and grow, suggesting that business entry reforms can have a substantial impact on the lives of the poor through employment generation. More firms implies more competition, provided that effective competition policies and enforcement mechanisms are in place. Findings from several studies document the positive impact of sector-specific competition policies on productivity. In retail and services, an empirical analysis of 1,948 retail stores located in 41 cities in India shows that procompetition reforms can improve productivity by 87%.15 Higher competition is also associated with cost savings for the private sector. In the transport sector, for example, breaking the Laos cartel and opening transit to all Thai truckers in 2004 reduced logistics costs from Bangkok to Vientiane by 30%.16 The reverse applies if the market remains concentrated in the hands of a few players. For example, the lack of telecommunication competition in Mexico has led to inefficient telecommunications markets that impose significant costs on the Mexican economy and burden the welfare of its population. The resulting loss of benefit to the economy is estimated at USD 129.2 billion (2005-2009), or 1.8% GDP per annum.17 Easy international trade flows and smart investment regulations are critical for firms seeking to expand internationally. Literature suggests that trade logistics reforms have a notable impact on productivity and GDP. For example, a 1% reduction in the time to export increases exports by 0.4%.18 Exporters are on average 28% more productive than nonexporters and have a higher rate of productivity growth.19 In addition, the impact of trade logistics reforms is higher in the poorest countries. It is estimated that reducing time to export by 1% could increase trade on average by 0.64% for Sub-Saharan African countries and 0.61% for South Asia, while it is lower for countries in the Latin American and the Caribbean region (0.37%).20 If firms run into difficulties, they should be given an opportunity to restructure or efficiently conclude operations. The recent economic crisis has underlined the importance of solid bankruptcy laws and effective dispute resolution mechanisms. Existing studies on insolvency laws suggest that effective insolvency regimes reforms can lead to more timely repayments and reduce the cost of credit and the failure rates among small and mediumsize enterprises (SMEs).21 Keeping businesses alive also increases returns to creditors, who have a chance to recover a larger portion of credit.22 But these studies are limited to specific 14 Motta M., Oviedo A. M., Santini M.. 2010. An Open Door for Firms: The Impact of Business Entry Reforms. The World Bank Group. Amin M. 2007.. Labor Productivity and Competition in India’s Retail Stores. Mimeograph; available at www.enterprisesurveys.org. 16 Arnold J.. 2005. Trade and Transport Facilitation in Laos. The World Bank. 17 OECD (2012), OECD Review of Telecommunication Policy and Regulation in Mexico, OECD Publishing. http://dx.doi.org/10.1787/9789264060111-en. 18 Djankov S.,Freund C., Pham C. S. 2010.. Trading on Time. The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 166173, 05. 19 Van Biesebroeck J. 2005.. Exporting Raises Productivity in Sub-Saharan African Manufacturing Plants. Journal of International Economics, Volume 67, Issue 2. 20 Subramanian U., Anderson W., Lee H. L.. Forthcoming. 21 Dewaelheyns, N., Van Hulle C.. 2006. Legal Reform and Aggregate Small and Micro Business Bankruptcy Rates: Evidence from the 1997 Belgian Bankruptcy Code. K.U. Leuven AFI. 22 Klapper L. 2011.. Saving Viable Businesses. The Effect of Insolvency Reform. Viewpoint. World Bank Group. 15 3 reforms in a few countries and additional evidence is needed to identify the actual effects on private sector. Research estimates that the total costs incurred by firms that use alternative dispute resolution (ADR) mechanisms range from 3 to 50% of the costs incurred by firms that go through a court litigation process.23 The estimates vary substantially across countries and studies, and additional empirical research is necessary. ADR can also increase the effectiveness of courts, through unburdening the court system, and improve trust in the legal system, which in turn may increase foreign investment.24 High tax rates and complex businesses regulations put a heavy financial and time burden on all business, small ones in particular.25 Cross-country research studies on business taxation suggest that lower effective tax rates are associated with higher foreign direct investment (FDI), approximately 1.6-2.1% of GDP.26 The effect on domestic investment is equivalent to 2% of GDP.27 While few studies suggest that simplifying taxes can increase formal firm creation and firms’ sales, more research is required to confirm these links. Some evidence suggests that investment promotion agencies (IPAs) can help countries attract FDIs. In a cross-country study of 124 countries, researchers conclude that IPAs can be an effective means of attracting FDIs, in particular in developing countries with higher levels of information asymmetry and marked by significant levels of bureaucracy.28 Taking into account the costs and benefits of investment promotion, the study concludes that a dollar spent leads to USD 189 of FDI inflows from the United States. Targeted sector promotion in agribusiness can also spur employment.29 However, this area also requires further research. Electricity sector reforms aimed at privatization and restructuring have led to significant improvements in operating performance of energy enterprises in many countries. Although cross-country evidence is scarce, reforms in Latin America show efficiency gains, such as labor productivity, lower distributional losses, higher installed capacity and utilization, and in some cases price decreases. In Argentina, which allowed for the development of one of the most competitive wholesale electricity markets in the world, spot prices of electricity declined by 60%, and investment in electricity generation and network expansion increased substantially (installed capacity almost doubled, distributional losses halved).30 Advances in ICT reforms related to investment climate improvements, such as introducing online business registration systems via e-government, can increase transparence and ease compliance burdens on firms.31 In Singapore, introducing online business registration, licensing procedures and a one stop online application system for certain special licenses reduced the cost of business incorporation from USD 700-20,000, depending on the capital of the company, to a flat fee of USD 175.32 A cross-country study of 85 countries has also 23 Love I.. 2011. Settling Out of Court: How Effective Is Alternative Dispute Resolution. Viewpoint. The World Bank Group. Id. 25 Tax Compliance Cost Surveys - Using data to design targeted reforms, CIC InPractice Note, 2010. 26 Djankov S. and other. 2010, Van Parys and James, forthcoming. 27 Djankov, S., Ganser T., McLiesh C., Ramalho R, Shleifer A.. 2010. The Effect of Corporate Taxes on Investment and Entrepreneurship. American Economic Journal: Macroeconomics 2 (3): 31–64. 28 Harding, T., Javorcik, B. Smarzynska.. 2011. Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows. The Economic Journal, Vol. 121, Issue 557, pp. 1445-1476. 29 Poulin R.. 2004. Assessment of USAID's fertilizer market privatization program: Bangladesh. http://pdf.usaid.gov/pdf_docs/PNABU208.pdf 30 Edenor (2001); Rudnick and Solezzi (2001); (CAISE, 2002); Fischer, Gutierrez, and Serra (2003); Politt (2003). 31 WDR 2005. 32 Id. 24 4 found a strong positive correlation between Corruption Perception Index33 and Digital Access to Information Index,34 suggesting that improved access to information through digital means, such as those supported by ICT reforms, is associated with lower corruption.35 3. Linkages between IC Reforms and Poverty Reduction The linkages between IC reforms and poverty reduction are two-fold. First, IC reforms can generate investment, increase the volume of trade and improve firms’ productivity, thereby making a substantial contribution to economic growth. Growth in turn increases people’s incomes and it reduces poverty. Second, IC reforms have a direct impact on the lives of the poor, through business creation, employment, improved access to infrastructure and other improvements driven by the reforms. 3.1 Economic Growth As previously shown, IC reforms help generate investment. The volume of investment matters for growth as it constitutes a fundamental part of GDP. Country evidence shows that economic growth rates have been the highest if accompanied by high savings and investment rates, while the opposite is true for low rates.36 A recent study in Africa examines the relationship between FDI inflows and poverty reduction. Using FDI net inflows per capita and the United Nations Development Program’s Human Development Index as the principal variables, the study confirms the positive and significant relationship between FDI net inflows and poverty reduction in Africa. In addition, FDI has a greater impact on welfare in poorer countries than it does in wealthier countries in the region.37 IC reforms spur international trade. Most economists agree that trade is also positively associated with economic growth.38 Dollar and Kraay (2001), for example, find a statistically significant effect of trade on growth. If the share of trade to GDP increases by 20%, growth increases by 0.5-1% per year.39 Trade promotes domestic competition, expands firms’ access to foreign exchange and allows them to exploit economies of scale. As was shown earlier, trade also spurs productivity of exporters, which in turn may induce positive spillover effects to other firms in the local economy. Investment, trade and competition policies increase productivity.40 Overall, there is growing evidence supporting the claim that productivity affects growth more than the actual accumulation of production inputs.41 For example, Hall and Jones (1999) found that the output per worker, which is a measure of productivity, was more than 35 times higher in the United States than in Niger. This means that in approximately 10 days, the average worker in the 33 The Corruption Perception Index or CPI (Transparency International, 2005) is selected as the means for measuring corruption, as it is the most comprehensive quantitative indicator of cross country corruption available. 34 The Digital Access Index or DAI 2002 is used as a proxy for access to information. The DAI measures the overall ability of individuals across 178 countries, to not only access but also use information and communication technology. 35 DiRienzo, C. E., Das, J., Cort, K. T., Burbridge, J., Jr.. 2007. Corruption and the role of information. Journal of International Business Studies, 38(2), 320-332. 36 Nallari R., Griffith B.. 2011. Understanding Growth and Poverty Theory, Policy, and Empirics. The World Bank. 37 Goho G., Soumaré I.. 2011. Does Foreign Direct Investment Reduce Poverty in Africa and are There Regional Differences? African Development Bank, Tunisia. Laval University, Quebec, Canada. World Development Vol. 40, No. 1, pp. 75–95. 38 Id. 39 Dollar, D., Kraay A.. 2001. Trade, Growth, and Poverty. Policy Research Working Paper 2615. World Bank, Washington, DC. 40 Productivity refers to two main concepts: labor productivity and Total Factor Productivity (TFP). Labor productivity refers to the valueadded produced by each unit of labor. TFP refers to the efficiency, with which physical and human capital, land, and natural resources are used to produce outputs. Both are positively affected by IC reforms. 41 Nallari R, Griffith B.. 2011. Understanding Growth and Poverty Theory, Policy, and Empirics, The World Bank. WDR 2005. 5 United States produced as much as an average worker in Niger produced in an entire year. The majority of this difference can be explained by differences in productivity, and not production inputs accumulation and education attainment.42 Early growth research emphasized technological progress in explaining productivity but recent studies show that broader environment, in which firms operate, matters as well.43 This can be understood in terms of property rights, institutions, or the investment climate. Productivity is thus the key to growth and investment climate reforms improve it. A body of literature provides evidence that the poor benefit from economic growth. For example, Kraay (2004) found that in the medium to long run, between 66-90% of the variation in changes in poverty can be accounted for by the growth in average incomes.44 Chart 3 demonstrates the relationship between the incomes of the poor and average per capita incomes in 137 countries. As we can observe, there is a strong positive correlation between the two variables, suggesting that poverty trends track growth trends very closely. Chart 3: Correlation of per capita incomes of the poor with average per capita income for 137 countries, 1950–99 Source: Dollar and Kraay (2002).45 3.2 Direct Improvements in the Lives of Poor People IC reforms have positive effects on the poor in their various capacities: Poor as Consumers The poor pay higher prices for basic goods and services than wealthier consumers for the same service or commodity. Often, these come at a lower quality.46 For example, evidence from Mexico shows that the costs of unfair competition are not distributed equally across social 42 Hall, R. E., Jones, C. I.. 1999. Why Do Some Countries Produce So Much More Output Per Worker Than Others? Quarterly Journal of Economics 114 (1), 83-116. 43 WDR 2005. 44 Kraay, A.. 2004. When Is Growth Pro-Poor? Cross-Country Evidence. Policy Research Working Paper 3225, World Bank, Washington, DC. 45 Dollar, D., Kraay A.. 2002. Growth Is Good for the Poor. Journal of Economic Growth 7: 195–225. 46 The Next 4 Billion, 2007. 6 groups and regions. Welfare losses of poor households due to market power exerted by companies on key goods were 20% higher (in relative terms) than the estimated welfare losses imposed on the highest income households.47 Competition and trade also push prices down and increase the variety of goods and services, including food, accessible to the poor. For example, lowering barriers to entry by 10% decreased price markup by nearly 6%.48 IC improvements also lowered the price of food in countries such as Ethiopia, Ghana, Kenya, Vietnam and Zambia.49 Poor as Users of Infrastructures 2.7 billon people worldwide rely on traditional biomass to cover basic energy needs. Overall, 36% of BOP households don’t have access to electricity and the lack of clean, affordable energy is part of the poverty trap for economic and social reasons.50 Collecting wood for cooking and purchasing kerosene for lighting is costly and translates into significant opportunity costs (time could be spent for work or school). For example, 99% of Nigeria’s household energy market classifies as BOP. Half of Nigeria’s population earn between USD 1-2 per day and spend USD 0.40 per day on energy.51 In addition, the International Energy Agency estimates that this leads to over 4,000 premature deaths per year (mostly due to indoor air pollution).52 Businesses are also heavily affected. The World Bank’s Enterprise Surveys in 89 economies show that electricity access is one of the biggest constraints to business. Average electricity outages per month are 6-times higher in low income countries than in upper middle income countries.53 For micro-enterprises, this poses substantial costs as they often have to supply energy from costly generators, while for more sophisticated SMEs, energy lack and outages inhibit their graduation to higher-value-added activities that rely on electricity-based technologies.54 Access to reliable electricity supply thus represents a significant opportunity to spur small firms’ growth, productivity and competitiveness. Poor as Employees The private sector is responsible for around 90% of employment in the developing world (formal and informal jobs).55 Formal and informal jobs are the main source of income for the poor. A recent study of 99 countries worldwide (Ayyagari, Demirguc-Kunt, Maksimovic, 2011) shows that while large firms have a significant employment share, small and mature firms (5-99 employees and older than 10 years) have the largest share of employment in developing economies. These firms also have the largest share of new job creation on developing countries.56 In addition, SMEs provide more opportunities for low-skilled workers than large firms.57 47 Urzua C.. 2009. Distributive and Regional Effects of Monopoly Power, EGAP Working Paper -2009-04. Hoekman, B., Kee H. L., Olarreaga M.. 2001. Markups, Entry Regulations, and Trade: Does Country Size Matter? Washington, D.C.: World Bank Policy Research Working Paper Series 2662. 49 Minot, N., Goletti F. 2000. Rice Market Liberalization and Poverty in Vietnam. Washington, D.C.: International Food Policy Research Institute, Research Report 114. 50 The Next 4 Billion, 2007. 51 Id. 52 Energy Poverty: How to make Modern Energy Access Universal? International Energy Agency. 2010. 53 Getting Electricity. A pilot indicator set from the Doing Business project. The World Bank Group. 2010. 54 Id. 55 WDR 2005. 56 Ayyagari M., Demirguc-Kunt A., Maksimovic M.. 2011. Small vs. Young Firms across the World: Contribution to Employment, Job Creation, and Growth. The World Bank Development Research Group. Policy Research Working Paper 5631. 57 WDR 2005. 48 7 IC reforms aim to increase employment by large firms and MSMEs. However, evidence of the impact of IC reforms on job creation (and firm survival) is very modest and requires more rigorous research.58 Also, we have no evidence that formal employment creation (which may result from IC reforms) benefits the poor as wage workers. Poor as Entrepreneurs A recent study suggests that between 22.5-34.5% of the global economic activity occurs in the informal economy. In low income countries, the estimates range between 29-57%.59 IC reforms seek to increase formality, which in turn improves access to finance, firms’ productivity and profits.60 Burdensome regulations have the opposite effect. For example, an increase in entry costs by 80% of income per capita is estimated to decrease productivity by 22%. 61 Relieving these constraints on businesses can thus benefit the BOP businesses. There is no conclusive evidence that entrepreneurs benefit from private sector savings brought by IC reforms. Some studies suggest that the costs of doing business, such as obtaining a license, or a permit, tend to impose a larger burden on small enterprise than on large ones. 62 Similarly, SMEs face higher cost when accessing financial services as they are perceived by banks as risky, costly, and difficult to serve.63 Time and cost savings spurred by IC reforms may serve as an extra ‘reserve’ for formal BOP businesses that can be used to avoid closures from financial distress or for productive business purposes.64 IC reforms also benefit financial institutions who are creditors of BOP businesses. Many developing countries face a high degree of financial exclusion and high barriers in access to finance. Improving timely repayments, the returns for creditors and thereby the aggregate level of credit can improve access to finance, which is critical in promoting growth and reducing income inequality.65 At the same time, there is growing evidence that IC reforms, which focus mainly on the formal sector, don’t have a sizeable impact on formalization. In fact, it seems that the great majority of poor hope to get a wage job, and that being an entrepreneur may not be their primary goal. Entrepreneurs benefit from lower corruption. Investment Climate surveys indicate that bribe payments as a share of sales are 50% larger for small firms.66 A recent study in Uganda examines the relationship between bribery payments, taxes and firm growth. The study finds that a 1% increase in the bribery rate is associated with a reduction in firm growth of 3%, an effect that is about three times greater than that of taxation.67 These findings suggest that 58 A simulation based on a recent study found that the introduction of a one stop shop for business registration in Guadalajara, Mexico, was associated with the creation of 5,520 new firms and 18,768 new jobs one year after the reform. Motta M., Oviedo A. M., Santini M.. 2010. An Open Door for Firms: The Impact of Business Entry Reforms. The World Bank Group. 59 La Porta, R., Shleifer A.. 2008. The Unofficial Economy and Economic Development. Tuck School of Business Working Paper No. 200957. 60 Data from Enterprise Surveys show that greater tax compliance is significantly associated with more access to credit. (Source: WDR 2005.) 61 Authors refer to TFP. The same increase in business entry costs also decreases output per worker by 29%. (Source: Barseghyan L. 2008. Entry costs and cross-country differences in productivity and output. Journal of Economic Growth Volume 13, Number 2 (2008), 145-167, DOI: 10.1007/s10887-008-9026). 62 WDR 2005. 63 Teima G. O., Ramsden N. P., Mirmulstein M. L.. 2010. IFC’s SME Banking Knowledge Guide. 2010. The World Bank. 64 For example, if ADR mechanisms are faster than court litigation, plaintiffs have a better chance of avoiding bankruptcy due to quicker payment. However, this impact is more difficult to measure (because of the lack of counterfactuals), and almost no empirical evidence has been found. Love I.. 2011. Settling Out of Court: How Effective Is Alternative Dispute Resolution. Viewpoint. The World Bank Group 65 Beck T., Demirgüç-Kunt A.. 2008. Access to Finance: An Unfinished Agenda. The World Bank Group Economic Review 3 (22): 383–396. 66 WDR 2005. 67 Fisman R., Svensson J.. 2005. Are corruption and taxation really harmful to growth? Firm level evidence. Journal of Development Economics 83 (2007) 63–75. 8 corruption is detrimental to private sector development and to the growth of small enterprises in particular. 4. Conclusion Evidence from research suggests that investment climate matters for the poor. IC reforms aim at increasing countries’ exports, productivity, investments, firm creation, and firm savings, among other impact indicators. IC project portfolio makes a significant contribution to the lives of the poor. Over a third of IC projects and funding is located and spent in Sub-Saharan Africa. Also, IC reforms seek to expand opportunities for all firms, not just large and influential ones, but also micro-enterprises and SMEs from the BOP. The relationship between investment climate and poverty reduction can be understood in two ways. First, the impact of IC reforms can be seen on the aggregate level, through facilitating investments, exports and improving productivity. These, in turn, spur economic growth, which positively affects the poor through the improvements to their income. Second, IC reforms affect people directly. The gains can be seen through the lenses of people capacities as employees, entrepreneurs, consumers or users of infrastructures and finance. Entrepreneurs can capitalize on increased productivity, private sector savings and access to finance if their businesses are registered, trade logistics is made easier, insolvency regimes are improved and the overall regulatory environment is more transparent and predictable. Going forward, more country-specific and cross-country research is needed to better understand and confirm the linkages between a better investment climate and poverty reduction. While the effect of improved business entry regulations on firm creation has been well documented, less is known about their impact on firm survival and employment. This applies to the impact of business taxation, insolvency, ADR and other IC reform areas as well. 9