A good business environment makes it easier for firms from microenterprises to multinationals to enter and exit markets, which contributes to higher productivity, faster growth and creates jobs. A good business environment will benefit both domestic and foreign investors. Domestic and foreign investors invest where they find profitable opportunities, and try to avoid risks. In this paper, we use firm level survey data of the manufacturing firms in three different commercial strong Libyan cities to determine the influence of the business environment on the growth of the employment of the firms. The Structural Equation Model (SEM) method is used in this paper and the empirical variables are calculated for the purpose of the study. We find that corruption, crime and access to finance are the main obstacles that hamper the employment growth of manufacturing firms in Libya. However, the research does not reveal any significant effect of business regulations and the level of competition faced by the firm on the growth of the firm’s employment. These results have important policy implications for the priority of reform efforts. To improve the Libyan business environment, the government of Libya should enforce the Anti-Corruption Law and should make the financial system more dynamic, by establishing a clear regulatory system and by continuing to open up the banking sector to private investment. They should also provide access to high quality financial services and to capital. The government also must work hard and take urgent steps to improve security.