How the Ease of Doing Business Affects Entrepreneurship across Countries

There are a number of factors that explain why the level of business entrepreneurship varies so much across countries. In 1776, Adam Smith argued in The Wealth of Nations that the free-enterprise economic system, regardless of whether it’s in the United States, Russia, or anywhere else in the world, encourages entrepreneurship because it permits individuals freedom to create and produce.^[1] Recent versions have been edited by scholars and economists. Such a system makes it easier for entrepreneurs to acquire opportunity. Smith was focused mostly on for-profit businesses. However, constraints on the ownership of property might not necessarily constrain other types of entrepreneurship, such as social entrepreneurship.

Business entrepreneurship and social entrepreneurship are clearly related. Researchers have observed that in countries where it’s relatively easy to start a business—that is, to engage in business entrepreneurship—then it’s also comparatively easier to be a social entrepreneur as well. One useful information resource in this regard is the World Bank’s annual rankings of “doing business”—that is, the Doing Business report provides a quantitative measure of all the regulations associated with starting a business, such as hiring employees, paying taxes, enforcing contracts, getting construction permits, obtaining credit, registering property and trading across borders.^[2]

Doing Business is based on the concept that economic activity requires good rules. For businesses to operate effectively, they need to know that contracts are binding, that their property and intellectual property rights are protected, and that there is a fair system for handling disputes. The rules need to be clear yet simple to follow so that things like permits can be obtained efficiently.

The World Bank’s Doing Business Project looks at laws and regulations, but it also examines time and motion indicators. Time and motion indicators measure how long it takes to complete a regulatory goal (e.g., getting a permit to operate a business).

Thanks to ten years of Doing Business data, scholars have found that lower costs of entry encourage entrepreneurship, enhance firm productivity, and reduce corruption.^[3] Simpler start-up regulations also translate into greater employment opportunities.^[4]

Beyond describing local business practices, one of the key objectives of the Doing Business Project is to make it easier for entrepreneurship to flourish around the world. Considerable progress has been made each year in this regard, with 2010 being noted as a record year in regard to business-regulation reform. The countries with at least one positive reform are shown in the following figure.

Source: “Percentage of Countries with at Least One Positive Reform,” Doing Business, accessed June 3, 2011, http://www.doingbusiness.org/reforms/events/~/media/FPDKM/Doing%20Business/Documents/Reforms/Events/DB10-Presentation-Arab-World.pdf.

Among the most populated countries, the World Bank suggests it’s easiest to do business in the United States, the United Kingdom, Canada, Australia, and Thailand; the most difficult large countries are Côte d’Ivoire, Angola, Cameroon, Venezuela, and the Republic of the Congo. Among the less populated countries, the easiest-to-do-business rankings go to Iceland, Mauritius, Bahrain, Estonia, and Lithuania; the most difficult are Mauritania, Equatorial Guinea, São Tomé and Príncipe, and Guinea-Bissau. You can experiment with sorting the rankings yourself by region, income, and population at http://www.doingbusiness.org/economyrankings.

Differing Attitudes about Entrepreneurship around the World

Entrepreneurship takes place depending on the economic and political climate, as summarized in the World Bank’s Doing Business surveys. However, culture also plays an important role—as well as the apparent interest among a nation’s people in becoming entrepreneurs. This interest is, of course, partly related to the ease of doing business, but the cultural facet is somewhat deeper.

Turkey, for instance, seems a ripe location for entrepreneurship because the country has relatively stable political and economic conditions. Turkey also has a variety of industries that are performing well in the strong domestic market. Third, Turkey has enough consumers who are early adopters, meaning that they will buy technologies ahead of the curve. Again, this attitude would seem to support entrepreneurism. Yet, as Jonathan Ortmans reports in his Policy Forum Blog, currently only 6 percent workers are entrepreneurs—a surprisingly low rate given the country’s favorable conditions and high level of development.^[5] The answer to the mystery can be found in the World Bank’s most recent report, which shows Turkey to be among the most difficult countries in which to do business. The Kauffman Foundation, on the basis of its own assessment, likewise identified many hurdles to entrepreneurship in Turkey, such as limited access to capital and a large, ponderous bureaucracy that has a tangle of regulations that are often inconsistently applied and interpreted. Despite all the regulations, intellectual property rights are poorly enforced and big established businesses strong-arm smaller suppliers.^[6]

However, the Kauffman study also suggests that perhaps the most difficult problem is Turkey’s culture regarding entrepreneurship and entrepreneurs. Although entrepreneurs “by necessity” are generally respected for their work ethic, entrepreneurs “by choice” (i.e., entrepreneurs who could be pursuing other employment) are often discouraged by their families and urged not to become entrepreneurs. The entrepreneurs who succeed are considered “lucky” rather than having earned their position through hard work and skill. In addition, the business and social culture does not have a concept of “win-win,” which results in larger businesses simply muscling in on smaller ones rather than encouraging their growth or rewarding them through acquisition that would provide entrepreneurs with a profitable exit. The Kauffman report concludes that Turkey is in as much need of cultural capital as financial capital.

Is there a way for you to gain insights into a country’s entrepreneurial culture and therefore better explain why entrepreneurship varies so much? While there’s no perfect answer to this—just as it’s impossible to provide you with a survey telling you whether you will be a success or a failure as an entrepreneur—you may find it of interest to compare the motivations for engaging in entrepreneurship across countries. The Global Entrepreneurship Monitor (GEM) is a research program begun in 1999 by London Business School and Babson College. GEM does an annual standardized assessment of the national level of entrepreneurial activity in fifty-six countries. The GEM reports are available at http://www.gemconsortium.org.

GEM shows that there are systematic differences between countries in regard to national characteristics that influence entrepreneurial activity. GEM also shows that entrepreneurial countries experience higher economic growth. On the basis of another set of surveys and the corresponding index prepared annually by the World Economic Forum (WEF),^[9] countries are broken out in groups, including factor-driven economies (e.g., Angola, Bolivia, Bosnia and Herzegovina, Colombia, Ecuador, Egypt, India, and Iran), efficiency-driven economies (e.g., Argentina, Brazil, Chile, Croatia, Dominican Republic, Hungary, Jamaica, Latvia, Macedonia, Mexico, Peru, Romania, Russia, Serbia, South Africa, Turkey, and Uruguay), and innovation-driven economies (e.g., Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, the Netherlands, Norway, Slovenia, South Korea, Spain, the United Kingdom, and the United States). Somewhat like the Doing Business survey, the WEF ranks national competitiveness in the form of a Global Competitiveness Index (GCI). The GCI defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country.” The GCI ranks nations on a weighted index of twelve assessed pillars: (1) institutions, (2) infrastructure, (3) macroeconomic stability, (4) health and primary education, (5) higher education and training, (6) goods-market efficiency, (7) labor-market efficiency, (8) financial-market sophistication, (9) technological readiness, (10) market size, (11) business sophistication, and (12) innovation.^[10]

Factor-driven economies are economies that are dependent on natural resources and unskilled labor. For example, Chad is the lowest-ranked country in the GCI, and its economy is dependent on oil reserves. Because its economy is so tied to a commodity, Chad is very sensitive to world economic cycles, commodity prices, and fluctuations in exchange rates. The pillars associated with factor-driven economies are institutions, infrastructure, macroeconomic stability, and health and primary education.

Efficiency-driven economies, in contrast, are found in countries that have well-established higher education and training, efficient goods and labor markets, sophisticated financial markets, a large domestic or foreign market, and the capacity to harness existing technologies, which is also known as technological readiness. The economies compete on production and product quality, as Brazil does. Brazil has a per capita gross domestic product (GDP) of about $7,000.

Innovation-driven economies, finally, are economies that compete on business sophistication and innovation.^[11] The United States, with a per capita GDP of about $46,000, ranks first overall in the GCI due to its mature financial markets, business laws, large domestic size, and flourishing innovation.

Using the criteria for factor-driven, efficiency-driven, and innovation-driven economies and the most recent surveys results, the following figure summarizes the range of activity across a select group of countries.