all of the World Bank Group, for very useful comments on an earlier version of the paper. Data: regional gaps in performance and institutional environment The data on which we have estimated business growth equations come from the 2002 and 2005 waves of the FACS survey. The 2002 wave covered some 1856 predominantly small and medium sized enterprises sampled from 11 two-digit industries and 40 cities in 11 states. The states were Andra Pradesh, Delhi, Gujarat, Karnataka, Kerala, Maharashtra,

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... ya Pradesh, Punjab, Tamil Nadu, West Bengal and Uttar Pradesh. The industries were garments, textiles, leather goods, pharmaceuticals, consumer electronics, white goods, machinery, auto parts, metal products, chemicals and plastics, food processing. The 2005 wave successfully revisited 975 of the enterprises surveyed in the 2002 wave and expanded the full sample to 2287 by including more than a dozen new cities from four additional states. The newly added states were Bihar, Jharkhand, Orissa, and Rajasthan. Although the survey instrument diverges significantly between the two waves, there was large enough overlap to generate a panel dataset on a wide range of economic indicators and institutional variables. Also, each wave collected production statistics and financial data on the preceding three years. The length of the panel for production statistics is therefore six years rather than two. It is this aspect of the data that we have exploited in estimating a dynamic specification of the rate of investment.