"This paper presents new evidence on the causal links between changes in the business environment and firm productivity growth. It contributes to the literature in three important aspects. First, it constructs a unique database merging information from two large firm-level databases. The samples of both databases are merged on four criteria-country, sub-national location, firm size, and year-producing a panel of 22,004 firms in eight economies of Eastern Europe and the former Soviet Union: Bulgaria, Croatia, Czech Republic, Estonia,, Poland, Romania, Serbia, and Ukraine. Second, the paper addresses shortcomings of earlier studies, namely reverse causation, multicollinearity, and unreliable productivity estimates. Firm productivity growth is estimated drawing on corporate financial data from manufacturing firms included in the AMADEUS database. Changes in the business environment are estimated from the World Bank Enterprise Surveys conducted in 2002 and 2005. Multicollinearity problems in the full model regression are mitigated by constructing a set of six aggregate indicators of the business environment (using principal component analysis). The paper finds that, over the period 2001 to 2004, an increase of one standard deviation in infrastructure quality, financial development, governance, labor market flexibility, labor quality, and market competition raises the total factor productivity of the average firm by 9.8, 7.8, 3.2, 3.4, 5.8, and 3 percent, respectively. Lastly, the paper decomposes firm productivity growth and ranks the relative impact of changes in these six aspects of the business environment by country, by firm size, and by industry. "--World Bank web site.