Firm performance and business environment : how important and predicative are municipality rankings for firms´ performance in Norway?

2017

A number of empirical papers have concluded that there is a significant correlation between a

firm’s business environment - encompassing factors such as education, labour, demographics

and health – and its financial performance. It has been argued that an improvement of the

business environment in a region also improves its economic strength by increasing local

firms’ performance.

This master thesis tests if such a relationship is evident also in Norway. I use two large datasets

on firm performance and municipality rankings to create models that control for several layers

of fixed effects. Firstly, I investigate the relationship between business environment and

individual firm performance. Secondly, I look at the municipality level aggregated

performance of firms. Lastly, I analyse the connection between a firm’s moving behaviour and

the change in its business environment. To gain further insights on the topic, the paper

additionally splits the tested firms into industry and size groups.

In general, I do not find a significant relationship between local business environment and

firm performance, which is in disagreement with most of the relevant literature. However, for

small firms and firms within two industry groups, evidence of a relationship is observable.

Additionally, investigation of the role played by the fixed effects reviles that the region fixedeffect,

including factors such as the business environment but also other factors, plays a major

role for the performance of small and medium sized firms. Moreover, I found that the business

environment significantly affects a firm’s moving decision. In fact, this relationship holds true

for most firms in the dataset.