In order to promote the economic and social development of countries, improving their business environment for private entrepreneurs is key. The World Bank’s eight annual Doing Business report, which tracks relevant regulations in 183 economies, has become influential since governments are increasingly concerned about their rank and reputation in the global commercial arena. Given this background, the related report Investing Across Borders issued by the World Bank for the first time in 2010, might become equally important for foreign investors.
The ease of doing business for local companies is measured by the World Bank Research team by aggregating indicators in nine areas: starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. This aims to reflect regulatory changes with respect to the entire business cycle of a firm. On more than 250 pages, the Doing Business 2011 report contains an abundance of useful data, including individual tables for all countries, which were collected in cooperation with more than 8200 local partners.
The annual ranking of the countries always attracts a lot of attention by both media and authorities, which is appropriate, since this is about measuring the degree of competitiveness. Still, the information value of a country’s yearly movement up or down the rank is somewhat limited. The relative position of each economy depends on developments in other economies, too. An interesting perspective for observers monitoring country performance is to see how the regulatory environment for doing business has changed over several years.
For this purpose, the 2011 report includes a new five-year measure. The ten economies with the highest cumulative change scores are (with the overall rank): Georgia (12), Rwanda (58), Belarus (68), Burkina Faso (151), Saudi Arabia (11), Mali (153), Kyrgyz Republic (44), Ghana (67), Croatia (84) and Kazakhstan (59). Two aspects deserve further consideration. Some countries have obviously started from a low level, which is laudable as long as they are really seeking to apply best practices and do not simply pass regulations on paper in order to improve appearance. Moreover, the Doing Business indicators certainly do not measure democracy or political liberty and security. Others factors relevant for the business environment are also left out, such as the macroeconomic conditions, infrastructure, corruption, workforce skills, market regulation and the financial system.
Since the report mentions these limitations, one should look into additional sources for these factors in order to get a complete picture (Global Risk Affairs will provide information about relevant public sources in future articles). At the same time, it is safe to say that exactly the limited scope and the specific focus of the Doing Business approach enabled it to actually influence policy debates and encourage reforms in many countries otherwise averse to political interference in domestic affairs. This a proven and remarkable achievement. But there is another more fundamental analytical dimension here, that makes the Doing Business initiative a rather innovative tool for conducting risk due diligence with respect to individual countries.
For foreigners, the data provides a rather sophisticated indication of the thickness of ‘red tape’ in a country. Bad regulation and inefficient bureaucracy usually coincide with increasing informality. Where procedures are in-transparent and arbitrary, businessmen are dependent on dubious ‘middlemen’ in order to get things done. The risk of getting caught in a network of corruption and bribery is extremely high under these conditions. Milder, but nonetheless irritating features of informality involve patronage and clientelism, which also undermine the desired integrity and predictability of economic interactions. ‘Red tape’ in its various manifestations is a worldwide risk, incidentally not limited to developing countries. By contrast, adopting clear and fair business regulation not only empowers local entrepreneurs but also strengthens the state by improving conditions for the formal economy. Examples include administrative efficiency and effective tax collection.
Investing Across Borders
Convincing governments of the benefits of attaining a reputation of good regulation and reliability is ultimately also the goal of a new World Bank report which addresses the business environment for foreign direct investment (FDI) in 87 countries. The report Investing Across Borders was introduced for the first time in summer 2010. Since this data research project still displays a pilot nature, no rankings are included for now. This might change in future reports. As usual, the reader is advised to take the chapters about methodological issues and certain limitations into consideration. Specific quantitative data always requires a critical qualitative evaluation in order to set the results in the broader context for each country.
The selected indicators for determining the FDI policy of a country focus on national regulations and practices for investing across sectors, starting a foreign business, accessing industrial land and arbitrating commercial disputes. The data was once again collected by drawing on the expertise of local partners, such as accounting and consulting firms, in order to find out how legal provisions are implemented. The combination of de iure and de facto indicators was designed in a practical and reform-oriented way. Governments willing to improve the business environment for foreign-owned companies can do so based on the best practices identified under the four topics.
Overall, this report stresses the importance of good regulation, rather than mere de-regulation, which is definitely appropriate, since foreign direct investments might touch upon sensitive national issues, such as wider economic, environmental or social concerns. Good regulation establishes transparent, predictable and effective laws and procedures that really matter for potential investors not familiar with the local environment. A foreign company considering setting up a subsidiary, which is the assumed scenario in this report, needs confidence in the quality and validity of the legal framework that is meant to secure its investment.
Even though only 87 countries are featured due to a priority list for this pilot study, a rich data base is available representing seven world regions: Sub-Saharan Africa, Middle East and North-Africa, Eastern Europe and Central Asia, South Asia, East Asia and the Pacific, Latin America and the Caribbean, and high-income OECD countries. Particularly useful for potential investors is the sector-specific information, which differentiates between the regulations in manufacturing, construction, retail, or tourism and generally more restricted areas such as media, transport, electricity and telecommunications. The Investing Across Borders website provides a search function enabling visitors to conduct data research by selecting individual economies and topics. This service complements the extensive chapters in the full Report on topics and regions as well as the instructive list of detailed country profiles.
At the current stage of the project no aggregation of indicators at the topic level and no ordered ranking of the countries’ overall performance is included. This might encourage the reader to look into the details. For comparative purposes single scores are always bench-marked against the regional and global average. In addition, verbal summaries support the interpretation of the data. The documentation of the data is completed by linking it to information about regulatory authorities and legal sources.
Given the strong impact of the Doing Business project, on which Investing Across Borders can build, one should expect the new project by the World Bank to also stimulate policy debates on best national regulations for foreign direct investments. Many governments will see this as a matter of reputation to be capable of competing for and attracting global business. That reputation not only depends on good regulation but also on acting in accordance with the legal provisions. Investors will use the data base to support their decision-making process for establishing subsidiaries in foreign countries and might give feedback by assessing de facto compliance with the law by local authorities. In sum, in a limited but substantial area, the Investing Across Borders project has the potential to improve good governance globally.