Are strong neighbors good neighbors? “Doing business” spatial spillover effects and policy learning

Abstract

In this paper, we introduce a novel econometric framework to investigate the producers and recipients of the spillover effect. We find that proximity to neighboring economies with pro-business policies is associated with improvements in a domestic economy’s business environment. This positive spatial spillover is predominantly generated by high-income economies, while low-income economies exhibit negligible impact on their neighbors. Furthermore, non-African low-income economies benefit more from their neighbors’ business reforms compared to high-income ones. Our analysis also reveals that the magnitude of the spillover effect is moderated by the physical adjacency (land or maritime borders) and political alignment between neighbors. Only high-income economies demonstrate the ability to translate an enhanced business environment into superior economic outcomes. We highlight the importance of business connections between neighboring economies.