Existing business climate literature provided evidence for the effect of business constraints such as infrastructure, finance, institutions, corruption, and business regulation on firm performance and growth. Talking about infrastructure such as electricity, several studies argued that adequate and reliable electricity matters for firm performance. For example, Fakih et al. (2020) uses measures of firm performance such as sales, employment, and productivity growth rates to examine the impact of power outages on manufacturing firms’ performance in the Middle East and North Africa region using data from the World Bank enterprise survey. The study provided evidence that power outages in all its forms have adverse effect on manufacturing firm performance and much evident in sales and labour productivity growth rates. Similarly, Iimi (2011) established that frequent electrical outages increase corporate costs for enterprises in 26 transition economies in Eastern Europe and Central Asia; while Abdisa (2019) discovered that investing in self-generation reduces outage loss for firms that invest in self-generation, although such firms continue to experience greater unmitigated outage loss than their counterpart (firms that did not invest in self generation). On the other hand, Geginat and Ramalho (2015) identified level of bureaucracy in low-income countries to be significant factor that explains inefficiency in utilities distribution in these countries, and support the premise that electricity connectivity matters for firm performance. The study indicated that firms that face smaller and less costly electricity connection processes have better performance and most especially in sectors with high needs for electricity.
Related studies examined the general impact of infrastructure quality on business performance. Findings from Escribano et al. (2010) for manufacturing enterprises in 26 African countries established that infrastructure quality has a high negative impact on low-income countries’ total factor productivity and a minor positive influence on high-income countries’ total factor productivity; while Iimi et al. (2015) revealed that infrastructure quality are essential for enhancing enterprise productivity in selected five East African countries. Rentschler et al. (2019), on the other hand, estimated the monetary cost of unreliable infrastructure for firms in 137 low- and middle-income nations to be around $300 billion each year, with annual utilization losses of $151 billion.
Another body of literature channeled concern to the institutional aspect of business environment, specifically governance, regulation and corruption, and determine their impact on firm growth and performance, and access to credit and public utilities. For example, Yang (2017) used firm-level data for small and medium enterprises in Latin America and the Caribbean region to provide evidence that weak environment reduces the performance of innovative SMEs compared to their counterpart. In the same vein, Amin and Ulku (2019) used firm data for more than 39,000 enterprises in 111 countries to show that corruption adversely affect firm productivity and highly significant in times of high regulation. Ayyagari et al. (2014) provided evidence that innovative firm especially those in countries with excessive bureaucratic regulations and weak governance institutions are more likely to face rent seeking from government officials and still does not face better service delivery. In the same vein, Freund et al. (2014) showed that contrarily to popular opinion that demand for bribe is associated with quick service delivery, the amount of time to secure an operating license, building permit, or electrical connection is 1.5 times longer for firms that are faced with bribes demands than their counterpart (firms that are not faced with bribe demands); 1.2 times longer to clear customs when exporting; and 1.4 times longer when importing. Amin and Motta (2021) also established evidence that corruption in developing countries limits SMEs access to credit in a strong way and estimated that every increase in bureaucratic corruption, say from the minimum to maximum value, SMEs chances of being financially constrained increases from 6.9 to 10.9 percentage points.
In addition to some of the mentioned constraints, factors such as access to finance, competition from informal sector, crime, etc are as well recognized in business literature as key predictors of business success. For example, Essmui et al. (2014) applied method of Structural Equation Model (SEM) to analyze the impact deplorable business environment on manufacturing firms’ employment growth using enterprise data of 207 enterprises operating in three commercial cities of Libya. The study identifies lack of finance, crime, human capital, corruption, and infrastructure to be significant factors that obstruct employment growth of firms in Libya, but fail to obtain evidence for the effect of competition and business regulations on firms’ employment growth. Similarly, Aterido et al. (2009) used enterprise data for more than 56,000 establishments in developing and high-income economies to study the effects of the business environment, mainly infrastructure, access to credit, corruption, and business regulations on firms’ employment growth while accounting for heterogeneity across firm size. Evidence from the study indicated that employment growth rate for medium and large firms is adversely affected by lack of access to credit and deplorable infrastructure, while that of small firms is mostly affect by business regulations.
In similar study, Klapper et al. (2010) provided evidence that formal sector growth measured by firm entry and density rates are robustly related to measures of country’s economic growth and development, level of legal and institutional (regulatory) development, ease of access to finance, and activities of the informal sector. Further evidence from the study supports the premise that business environment proxy by ease of starting a business and political corruption are significant predictors of the number of firm registrations. Applying methods of regression analyses and Directed Acyclic Graph methodology, Ayyagari et al. (2006) provided evidence that business constraints pertaining to finance, political instability, and crime are binding constraints that have direct influence on firm growth, with finance having the largest impact. Ullah (2020) also indicated that inadequate finance has adverse effect on sales and employment growth of SMEs in 28 Eastern European and Central Asian countries after accounting for differences in countries level of development, institutional quality, and corruption. Amin and Viganola (2021) obtained similar evidence that firms with access to finance before the Covid-19 pandemic have lower likelihood of experiencing decreased sales during the pandemic; while Bahy and Cooper (2012) identify lack of access to credit and degree of competition as major constraints limiting income growth of small firms in Northern Myanmar.
Aterido et al. (2007) examined the impact of credit access, business regulation, corruption, and infrastructure on employment growth of 70,000 firms in 107 countries and found evidence of composition effects of business environment on firm employment growth, suggesting that weak business climate adversely affect employment growth of firms. The effects of access to finance and regulation reduce employment growth of all enterprises, most especially, micro and small enterprises; while corruption and deplorable infrastructure reduce employment growth of medium and large enterprises. In a comparison study of Africa and the rest of the world, Aterido and Hallward-Driemeier (2010) assessed how access to credit, infrastructure, regulatory environment, and corruption affect patterns of employment growth in Sub-Sahara Africa using World Bank Enterprise Survey for 104 countries including 31Sub-Sahara African countries. The authors argued that despite the fact that Sub-Sahara African has a challenging investment climate than the rest of the world; it does not translate to low employment growth. Instead, more of the major constraints; particularly, access to finance and infrastructure translate to expanding micro enterprises. The effect of power outages is found to lower employment growth of large firms in the region but promotes employment growth of micro firms.
Another body of literature took a different approach to examine the impact of business environment on firm entry and choice of entry. For example, Klapper et al. (2004) used firm-level data for Western and Eastern Europe to establish evidence that entry regulations hampers rate of firm entry and more evident in sectors that naturally should have high rate of entry, which further translates to lower output per worker in the sector especially for countries with burdensome regulations on entry. In the same manner, Klapper et al. (2009) used data from business registries to establish evidence that better governance and lesser burden in starting a business such as a fast, efficient, and cost-effective business registration process are important factors that drive entrepreneurship activity in the formal sector. Also, Klapper and Love (2010) used longitudinal data on new firm registrations in 91 countries to show that the number of new firm registrations is significantly determined by the required costs, days and procedures of starting a business.
Studies that have examined the impact of business environment on firm survival or exit appears to be scarce in literature with exception of very few. Studies like Orjiakor and Omeje (2022) provided evidence for the effect of infrastructure deficit on firm survival in Nigeria using data from World Bank Enterprise Survey. The study asserted that firms with improved access to infrastructure such as electricity, telecommunication, transportation, and quality institutional services have better chances to survive than those without such access. Hallward-Driemeier (2007) used dataset of enterprises operating in 27 Eastern European and Central Asian countries to establish that inefficiencies in business environment, specifically access to credit, efficiency of public services, corruption, level of competition, and strength of property rights are associated with higher risk of business exit. Similarly, Iwasaki et al. (2021) supported the premise that quality institutions and developed financial system help improve firm longevity, using dataset of 94,401 small enterprises in 17 European emerging markets from 2007–2017. In the same manner, Klapper and Richmond (2011) used data of registered businesses in Cote d’Ivoire for the period 1976–1997 to show that the risk of firm exit increases with types of reforms, while firm likelihood of survival increases monotonically with firm size and better economic performance; while Muzi et al. (2021) established that excessive regulation proxy by the amount of time senior executive spent dealing regulatory requirements increases the risk of firm exit during the Covid-19 pandemic.
Following an extensive review of literature, it appears that there is gap in literature to be filled in the area of business constraints and firm survival/exit especially in the context of developing countries. In other to bridge this gap in knowledge and contribute to literature, this study presents a new evidence for the impact of business constraints on firm risk of exit in developing using Nigeria as a case study.