Thinking About Doing Business

In class #1 of Entrepreneurship without Borders (at MIT Sloan) we discussed attitudes towards starting a new business.  In many countries, people want to become entrepreneurs, but they can access only limited types of opportunities.  Relatively small established elites, often with strong political connections, are able to mobilize the resources needed to build a company that can do well.  Class #2 focused on the details of the current situation in Portugal – the macroeconomy will presumably begin to improve and the basic enforceability of legal contracts seems fine, but we do yet see a breakthrough in companies being created by new entrepreneurs.  Below is a summary of the discussion in class #3.

The World Bank’s Doing Business indicators offer a rich set of data with many insights into the various barriers facing small and medium-sized business – as well as potential entrepreneurs.  These numbers provide a first-pass comparison across countries focused on (a) regulation, and (b) contract enforcement.

Singapore and Hong Kong are the impressive leaders of the pack (see Table 1.1 on page 3 of the executive summary of this report).  Countries can grow with an unfavorable environment, measured in this way, but this is more likely with a great deal of natural resources (e.g., offshore oil in Angola, ranked #172).  For most countries, it would be wise to look for a set of reforms that make it easier to do business.

Experience in Georgia since the mid-2000s is encouraging.  The government used the Doing Business indicators and related work to target their priorities – and made a great deal of progress, for example in terms of reducing the number of licenses required (for all kinds of activities) and creating a legal fast-track for applications (i.e., pay a premium and get your passport faster).

Regulatory simplification also makes it easier to reduce corruption – the available evidence (from Transparency International; see Appendix C, Table 1, “Bribery rates around the world”) is that Georgia made great progress on that front also.

More generally, some former communist countries have made significant headway in shedding their bureaucratic traditions.  There have also been impressive improvements in sub-Saharan Africa.

The cost and complexity of regulation may be easier to address than legal institutions (i.e., contract enforcement, insolvency regimes, credit information, legal rights of creditors, borrowers, shareholders).

Countries that rank surprisingly low, given their recent economic performance, in the Doing Business rankings include China and India.  In China, this may be an indication it is easier to do business with an official partner of some kind – being a purely private start-up is not always so easy.  And while India varies across sectors – e.g., software continues to be strong – there is plenty of onerous regulation for bricks-and-mortar businesses.

The Doing Business measures are not intended to pick up the size or nature of the opportunity for entrepreneurs.  Is there a big domestic market (e.g., China)?  Is there skilled labor – the talent – that wants to stay put and is available either at lower cost than elsewhere or otherwise better motivated (e.g., Indian software, complemented now by people who have been successful entrepreneurs in the US)?

Perhaps the most sensitive issue of all is labor regulation.  Entrepreneurs want to be able to hire people – and to fire them when they don’t perform or the business does not work out.  This does not sit well with existing labor law in some places – and it is a particularly contentious issue in peripheral Europe (although changes have been made in Portugal and other places).  The World Bank no longer emphasizes this reform – it is mentioned in the Doing Business report but not as part of the main indicators.

The Acemoglu perspective – which I share – is that longer-run institutions tend to predominate.  Reforms in the business environment are possible, and changes at the margin or in some exceptional countries can take place.  But it is hard to escape a long tradition of concentrated power in which only a few people get good opportunities.  And resistance to reform can also come from people in relatively protected positions – previously safe government jobs or regulated professions.

It is also very difficult to compensate people for any loss of power (or job security) as a result of reforms.  Even if they are offered compensation, such promises are not typically credible – once a group has given up power (or safe jobs), there is no incentive to actually provide the compensation.

The bigger question is: how much progress can you make with specific Doing Business-type reforms?  Does this change the political economy of a country – making it more pro-growth or creating broader opportunities for more people?

What kind of reforms just end up concentrating more power in fewer hands?

This piece is cross-posted from Baseline Scenario with permission.

One Response to "Thinking About Doing Business"

  1. Edward Stevens   September 17, 2013 at 9:12 am

    You can not be employed without an employer. The more employers the better.
    As noted many time before, big government, big companies, and big unions are NOT the friend of small employers,and individual freedom and responsibility.