Local Business Climate

By Pedro Herrera Catalán

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Local business environment depends on a wide range of microeconomic and spatial factors. According the Economic Geography literature these factors can be divided into two groups: ‘1st advantage’ and ‘2nd advantage’. The term ‘1st advantage’ denotes the necessary conditions for the profitable development of new economic activities. The term ‘2nd advantage’ refers to the sufficient conditions arising as a result of the emergence of agglomeration economies- the benefits that economic agents acquire by locating near each other. The interaction of 1st and 2nd advantages generates increasing returns and cumulative causation that support economic growth patterns at a local level.

This study proposes a Business Climate Indicator for Peru on the basis of the factors 1st and 2nd advantages of the Economic Geography literature (Venables, 2003; and Burgess and Venables, 2004). The first part of the paper reviews the determining factors of business location decisions. The second part constructs a Business Climate Indicator at the local level using the Municipal National Register 2004 and the Population and Household Census 2005. The indicator proposed examines the more appropriate environment for the business location at the municipal level in Peru.

The results show that, only 27.5% of the municipalities (464 out of 1686) promote an adequate business climate in Peru. These municipalities are located mostly in coastal regions, standing out municipalities located in the Lima - Callao Region, which have the highest score nationwide in the Business Climate Indicator. The indicator allows us to capture central features of external returns to scale are often found at the micro level. In addition, it provides us with useful insights for designing public policies into what will drive economic growth in a particular location in Peru.

The study concludes with some reflections on the need for making more efforts to improve business climate in Peru.

* Paper published in Journal of the Competence and the Intellectual Property, INDECOPI - Year 4, Number 8, Spring: 115-141 pp.