Is business' perception on selected formal and informal institutions affected by the business climate?

Abstract

Business climate is subject to the influence of both the informal (e.g. corruption and political connections) and formal institutions (e.g. business enabling policies and tax treatment). This paper seeks to explore the relationship between business climate and business' perception on corruption, political connections, tax treatment and business enabling policies in the context of a developing country. To test the proposed hypotheses, the following tests: Kruskal-Wallis, Jonckheere-Terpstra, and Mann-Whitney tests are applied on an original dataset containing 404 businesses from post-socialist Albania. Results show that business' perception on both formal and informal institutions differs across the business climate levels. As the business climate "moves" towards favorable level, it is observed that there is a decreasing trend in business' perception on business enabling policies and corruption, and an increasing trend in tax treatment and political connections. The post-hoc test reveals that businesses score higher on tax treatment and political connection when business climate is not favorable as compared to normal. Also, when comparing not favorable versus favorable levels, whereas in case of corruption the opposite results are met. Regarding business enabling policies, businesses score higher when the business climate is favorable compared to not favorable and normal levels. In conclusion, the business climate in Albania does not have a similar effect among informal institutions, nor among formal ones.