Friday, September 28, 2007


The 2008 Doing Business project solidly provided a valuable tool in ranking the economies with respect to the ease of doing business. The quality of the business environment is, by any means, one of the essential supporting components of growth and value creation. Put simply, the greater the flexibility of the business environment and the ease of doing business, the greater the opportunities for the firm to target markets and growth while the foremost advantage of a dynamic business environment is the minimization of external risk, notably macroeconomic risk and the risk emerged from external vulnerabilities such as the failure of the public administration to provide sound entrepreneurial framework and business conditions. In spite of vital importance of dynamic entrepreneurial framework, small-scale economies are, by empirical investigation, affected by the extent of quality of the business environment far more than the economies of large scale according to the share in global economy they possess. That’s why; the first-class quality of the business environment is essential to long-term creation of venture capital and jobs as well as to output growth.

First, let’s take a look at the microeconomic aspect of rating the quality of business environment. Suppose there is a consulting firm with a certain amount of investment from venture-capital fund with an idea to target and invest in emerging markets whether by direct market entry or by indirect market access, i.e. through intermediaries. Firm’s executive board mutually decides to hire local human capital; local labor to reduce the potential risk of firm’s perception of asymmetric information about the local business environment in conducting consulting services to local firms or branches of global firms. Assume that the decision processing is as in usual firm’s entry. The barriers to doing business, in turn, crucially impact firm’s decision for investment location accountably regarding the size and attractiveness of market niches. Suppose the firm is decided to target emerging markets in Central and Eastern Europe and in broader Asian market. Consequently, the firm obtains all available data and information about the particular business environment, varying which one to choose. If a firm jointly varied among Czech Republic, Hungary and Slovenia as a headquarter base, how would the quality of the particular business environment affect firm’s decision where to invest. Suppose each business environment carries-in some strengths and weaknesses. For example, Czech Republic offers sufficient transportation links to the rest of Eastern Europe while Hungary offers a sound and deregulated corporate conditions such as low corporate tax burden and dynamically competitive financial sector (access to attractive financial, capital and insurance services) while Slovenia offers sound access to potential booming markets in South-Eastern Europe. In Asia, the firm varies between sophisticated and growing markets, say between China, India and Vietnam and Singapore and Hong Kong on the other side. Depending on the preferences included in firm’s panel, where would the firm decide to invest in to setup a base for targeting specific markets?

Of course, it is impossible to predict all circumstances of the firm’s decision since information is distributed asymmetrically. But let’s predict the possible scenario with respect to the quality of business environment, assuming that firm’s main decisive objective is to decide for the location with the easiest and most business-friendly environment with least administrative and regulatory burden given the impact of external cost pressures affecting firm’s output and organic growth performance.

Depending on the impact of firm’s strategic decisions regarding the performance of output and supply, the firm would, by rational means, choose the environment with the least regulatory complexity and administrative burden such as the quickness of starting a business, time costs of getting required licenses, the flexibility of labor market, the security of property rights, access to credit information, transparency of transactions, self-dealing liability, shareholders’ suing ability for misconduct and hence, tax compliance and time cost of paying taxes, the costs associated with international trade, contract enforcement, and the legal protection of the deprived party in exchange in case of payment dispute or payment delay and the extent of procedural backlash in case of closing the business.

The quality of the above-listed factors crucially determines the overall attractiveness of a particular business environment as an investment location. Looking globally, Singapore, New Zealand and the United States were ranked among top 25 on most areas except for in the area of the difficulty of paying taxes in case of the U.S. Emerging market countries scored variably. Russia is ranked 106th, India 120th, China 83rd and Brazil 122nd. From investment decision aspect, high economic growth in BRIC despite the low quality of the business environment is driven by strong investment boosted by remaining influential factors such as low proportion of labor cost attached to manufacturing and the convergence potentials of the GDP in those countries nevertheless. What about countries in transition? As top performers, Baltic tigers par the quality of business environment of advanced countries. Estonia is ranked 17th, Latvia 22nd and Lithuania 26th. In central Europe, the ranking is much less competitive; Slovakia is ranked 32nd, Slovenia 55th, Czech Republic 56th and Poland 74th. Each year, Nordic countries constantly perform highly competitively. Taking a closer look on Nordic countries, the figures show that a typical Nordic business environment is almost completely free without hampering regulatory burden. Further, sophisticated and competitive access availability of venture and investment capital adds to the ease of doing business together with strong security contract validation and enforcement. Denmark’s flexible labor market free trade ranked it 5th respectively, Iceland is ranked 10th, Norway 11th, Finland 13th and Sweden 14th.

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