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

• High-income economies drive spatial spillovers : Pro-business reforms in high-income economies significantly improve neighboring countries’ business environments, while low-income economies act primarily as recipients • Income-classified spatial matrices : A novel spatial econometric framework distinguishes spillover directions by income level, overcoming limitations of traditional models. • Africa’s policy learning gap : African low-income economies fail to benefit from spillovers due to minimal policy imitation, unlike non-African peers that leverage reforms. • Economic gains hinge on income : EDB improvements boost international trade and GDP per capita, but only in high-income economies, highlighting institutional capacity as a critical enabler. • Policy imperative for connectivity : Proximity to high-income neighbors accelerates institutional upgrades, urging low-income economies to prioritize cross-border policy dialogue. 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.