The ―Doing Business" project of the World Bank

2.3.1. Purpose and method

A number of research institutions have embarked on assessing, quantifying and comparing the competitiveness of various countries. ¹⁶ The resulting reports contain survey-based indicators characterising the general economic and political conditions in the participating countries. One of the main goals of these publications is to inform international investors as well as locally operating businesses about the business environment.

The World Bank has published its" Doing Business " report since 2004 every year and it has become one of the most influential country rankings of regulatory competitiveness. The main issue addressed by the report is how regulations in the surveyed 150 to 180 countries affect enterprises and the economy in general. ¹⁷ The research is based on the hypothesis that economic success of a country is not only determined by its macroeconomic policy, but also by the quality of the regulations which affects enterprises and also by the quality of work of those institutions which supervise and enforce the compliance with these rules. Small- and medium sized enterprises are the main target group of the research.

The major information sources of the research are reports of local experts about various fields of regulation in their particular countries. The research evaluates those legal rules which enterprises are most seriously affected by, assesses the work of the implementing government agencies, moreover, it provides information about the dependence of enterprises on business services which they cannot avoid using (such as lawyers, accountants, auditors, etc.).

The database thus created provides a comparative frame for the comparative assessment of governmental regulatory reforms, provides information for planning such reforms, and highlights the good practices of countries that have introduced enterprise-friendly regulations. The database offers sub-indicators for a series of regulatory areas and computes a key composite country-level indicator of environment-friendliness. Since international development aid can be utilised most effectively in a positive regulatory environment and in case of sufficient institutional conditions, these indicators can be used in targeting aid for institutional development.

Moreover, the theories about the connection between regulatory framework and economic development can be empirically tested with the help of this research.

The individual yearly reports of the series survey the most fundamental functions / processes in the life of an average enterprise. Thus, in the annual of the year 2004 the regulatory environment of the following business processes / functions were highlighted:

a. the establishment of the enterprise,

b. the employment and dismissal of labour force,

c. the enforcement of the prescriptions put down in contracts, d. access to credit, and

e. putting an end to the operation of the enterprise.

in 2005 the above analysis was complemented with the regulatory aspects of the following business processes:

f. official registration of business properties

16E.g.: [WEF 2007]

17[WB 2004 - 2006]

g. protection of investments

In 2006 the regulatory aspects of the following business processes / functions were highlighted:

h. obtaining permits from government agencies i. taxation

j. foreign trade.

The following types of indicators were developed to measure the quality of the regulatory environment, the extent of administrative burdens, the complexity of the activities needed to comply with the assessed regulations, time- and cost aspects of complying with the assessed regulations. Some examples for the indicators of the Doing Business reports:

• The number of proceedings needed for the registration of a company

• An index indicating the flexibility of hiring or firing an employee.

• The duration of and cost of having a firm registered

• The costs of enforcing the provisions of a contract

The method of data collection and analysis is identical in the case of each business process / functions examined:

• A central research team elaborates and updates the methodology of the yearly report. A questionnaire is compiled as a tool to evaluate the regulation of the particular business process. This methodology will be distributed to local advisors in all of the surveyed countries. Local advisors in all of the surveyed countries collect the regulations in force that are affecting the assessed business process in the given country.

• The questionnaire is disseminated to the local experts who are proficient in the particular business process / function of the particular country: legal advisors and lawyers engaged in the affairs of enterprises, consultants and judges. These local experts respond to the questionnaires and return them to the central research team.

The interaction between the local experts and the central research team consists of several rounds: in each round the preliminary results are analysed and the questionnaire will be refined by introducing new aspects of evaluation. Subsequently, new waves of data collection follow. Thus, for example, the questionnaire covering the regulatory environment of starting a business was refined by adding the following aspect: what is the minimum requirement of starting capital in addition to the already existing indicators. This additional aspect was recommended by legal advisors who called the attention of the researchers to the fact that the requirement of starting capital often represented an effective limitation to entry for start-up companies.

• The outcome of the survey is a set of indicators. These indicators can be compared across business functions / regulatory fields and across countries, thus enabling the researchers to create country rankings.

The indicators are designed in a transparent way which makes their interpretation very straightforward. During the phase of questionnaire development, for each of the above mentioned enterprise functions / processes the researchers define in advance a very unambiguous, clear-cut hypothetic situation, a test case which the companies of every surveyed country are likely to face. This situation will be identified by exactly defining the type of company and the parameters of the test case. The specific questions of the questionnaire relate to the challenge defined with this hypothetic situation.

In 2006, for example, the indicator called „difficulties of starting an enterprise" and its components were based on the following assumption: The test case was that a company had to be registered with the following parameters:

• Limited liability company

• Operating in the most populous city of the country

• Entirely (100 %) possessed by local owners, 5 private persons

• Its starting capital is 10 times of the per capita GDP of the country and it has been paid at the end of 2005 in cash.

• The company intends to pursue general industrial or trading activity, does not export or import, does not produce specially taxed articles (alcohol, tobacco), and it does not considerably pollute the environment.

• The company rents its premises; it does not possess any real estate.

• The company is not entitled to receive investment subsidy or any other support.

• Following its registration, the company will operate with 50 employees, all of them local inhabitants

• Its annual turnover is at least 100 times of the GDP per capita

• Their company contract does not exceed 10 pages.

Having defined the above type of company, the questionnaire subsequently asks the standard questions about the administrative burdens associated with its establishment. This approach makes the results interpretable in a wide range, furthermore enhances their relevance and comparability.

According to the methodology of the ―Doing Business " survey, the indicator "difficulties of starting an enterprise" consists of four components. (1) the number of obligatory proceedings necessary for the registration of the company (interactions with the authorities, with public notary, with lawyer, with accountant, etc.), (2) the duration needed for the registration of the company, (3) the respective costs, (4) and the minimum level of starting capital.

The measurement of the indicator "difficulties of starting an enterprise" is further specified by adopting the following assumptions:

• Every interaction between the founders of the company and external parties (e.g. governmental offices, lawyers, audits, public notaries) is regarded as a proceeding to be counted. Interaction among the founders, leaders and the employees of the company are not taken into consideration as far as this indicator is concerned.

• The founders of the company carry out all proceedings themselves, without the help of accountants and lawyers, unless it is mandatory to involve such a party.

• Proceedings not obligatorily prescribed by the regulation cannot be taken into account.

• If the administrative procedure of company registration allows several possible procedures, then the simplest procedure with the minimum time duration is taken into consideration while calculating the indicator, provided this solution can be employed by a wide range of companies.

• Only those proceedings should be taken into consideration, which are compulsory for each enterprise. Thus, for example, among environment protection regulations only those should be counted in the indicator, which are mandatory for all enterprises. Similarly, proceedings for installing electricity, water, gas, and for arranging waste disposal services are taken into consideration only if there is a separate regulation which makes them compulsory for start up companies.

The above method is applied for every business function / process as listed under (a) to (j). Data collection is completed along these lines – in 2006, for example – in each of the 175 countries taking part in the research.

2.3.2. Selected results of the research

One of the most apparent results of the research is, that the business environment of less developed countries tends to be less enterprise-friendly: companies in these countries have to cope with more resource-consuming regulations than in developed countries. In a wide range of third world countries, the substantial regulatory burden on enterprises certainly contributes to stagnating productivity and economic development, high prevalence of informal economy and corruption.

The indicators of the „Doing Business " project provide information about countries providing advantageous regulatory framework for their enterprises. Such countries are not characterised by lack of regulatory activity,

rather, compliance with regulations is less costly and less burdensome in these countries. In Australia, for example, altogether 2 proceedings are needed to start a company, while in Bolivia 15, and in Chad: 12. The parallel indicators expressing the working time needed for starting a company prove the same: while in Toronto, Canada, 2 days are enough to start a company, in the capital of Mozambique, in Maputo, 153 days are needed for arranging the same issue.

It has been proven by a series of theoretical works that an institutional environment that effectively protects properties and creditors can contribute substantially to long term economic development. ¹⁸ In many developing countries uncertainties surrounding the possession of assets and registering property rights (e.g. those connected with land ownership) has lead to a situation whereby the capital possessed by average people cannot become effectively utilised in small enterprises. Such institutional difficulties may lead to the conservation of economic underdevelopment by themselves. ¹⁹ Businessmen facing the challenge of registering property rights or recovering of debts must waste much more efforts and can expect less success in underdeveloped countries than in developed ones. While in Helsinki 3 proceedings are necessary for the registration of a commercial property, in Abuja (Nigeria) 21 proceedings are needed for the same thing, and the costs of the registration may be as high as 30% of the value of the property itself. While in Tokyo, if the debtor goes bankrupt, the creditor can expect to get more than 90 cents after each dollar of the debt; in Mumbai (Bombay, India) the creditor will get not more than 13 cents in a similar situation.

It has been shown that in many cases standard regulatory solutions which have worked well in developed countries could be transplanted with success into less developed countries. For example, reforms involving (a) the reduction of the number of proceedings necessary for the starting of a company (registration of the company with the statistical agency, with the tax office, with the agency responsible for social insurance, etc.) and (b) introducing electronic procedures to company registration have led to outstanding results in Canada, Singapore, Latvia and Mexico, but in Honduras, Vietnam, Moldavia and Pakistan, as well. This finding contradicts the often repeated argumentation, according to which every region has its peculiarities, and that „one size doesn’t fit all".

By observing selected time series of the sub-indicators of the ―Ease of Doing Business " composite indicator, researchers may formulate empirically verified statements about the convergence of regulatory and small business development policies across new EU member states. Cross-country differences of regulatory content and quality between new EU Member States are decreasing. However, in spite of the Europeanisation process these countries have gone through, there are still very substantial deviations in various regulatory fields.