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What You Need to Know About the 5 Factors of a Country’s Business Environment

What You Need to Know About the 5 Factors of a Country’s Business Environment
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Whether you are currently a business owner or are looking to start your newest endeavor, you want to know that you are operating in a country that is welcoming and supportive of entrepreneurs and that sustains a productive and efficient business environment. 

From the outside, this may be hard to ascertain, particularly if you want to know how certain countries compare to one another or what factors comprise a country’s business environment. To help you answer some of these questions, here is what you need to know about the five factors of a country’s business environment.

What is the Legatum Prosperity Index?

The Legatum Institute, a London-based think tank, publishes an annual ranking of 149 countries around the world, weighing nine pillars that together comprise an image of prosperity. These nine pillars are Economic Quality, Business Environment, Governance, Education, Health, Safety & Security, Personal Freedom, Social Capital, and Natural Environment.

Due to their precise, comprehensive nature and the frequency in which they are published, the rankings in the Legatum Prosperity Index are highly acclaimed around the world and are utilized as an analytical tool by policymakers and political figures in many countries.

What does the Business Environment Pillar Measure?

According to the Legatum Prosperity Index 2018, “…the Business Environment pillar measures a country’s entrepreneurial environment and its business infrastructure, barriers to innovation, and labor market flexibility.” On a global level, this pillar has seen the most substantial one-year gain, due to its rise in every region.

The most significant increases in Business Environment can be seen in the regions of Asia and Eastern Europe, due largely to improvements in the entrepreneurial environment. Additionally, in Sub-Saharan Africa, the overall Business Environment score has increased due to significant, widespread developments in the ease of starting a business. 

The governments of Eastern Europe have been focusing on improving investor protection and reducing hurdles for individuals who are looking to start their own company. This emphasis on making the process easier and less risky has brought the region to (almost) the same score as the global average.

Which Countries Are Top-Ranking in Business Environment?

For 2018, the top 10 countries in the Business Environment pillar are:

1. The United States of America

2. New Zealand

3. Canada

4. United Kingdom

5. Singapore

6. Finland

7. Hong Kong

8. Denmark

9. Australia

10. Switzerland

What Are the Five Factors Included in the Business Environment Pillar?

The five factors are the entrepreneurial environment, business infrastructure, access to credit, investor protections, and labor market flexibility. You can read more about each of these factors below.

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1. Entrepreneurial Environment

This factor evaluates the ease with which an individual can start and run a  business, as well as how easy it is to advance and succeed. For the entrepreneurial environment, the leading indicators include the opinion that it is easy to start a company and the understanding that working hard will lead one to success, as well as the actual ease of becoming an entrepreneur.

This factor plays a notable role in a country’s overall business environment, such as in the case of Japan which, despite having the world’s best business infrastructure, only ranks 137th in the world for entrepreneurs thanks to its intricate controls regarding starting a business.

On the other hand, Oman (which is ranked 69th of 149 countries overall) has newly eliminated the obligation for entrepreneurs to pay minimum capital within three months. Additionally, this Middle Eastern country has streamlined its process for businesses doing employee registration, which makes a significant difference. That being said, the country still dropped four places in the Business Environment pillar, demonstrating that there are still more changes that need to be made.

2. Business Infrastructure

This factor explores the infrastructure that is necessary to facilitate business development and market access for individuals and companies. This infrastructure includes (but is not limited to) transport, logistics, utilities, and communications. For Business Infrastructure, the key indicators are logistics performance, cost of broadband subscriptions, and the price to receive electricity connection (% of GDP per capita).

Unfortunately, as a region, Latin America and the Caribbean saw a fall in their score for this sub-pillar due to the rising cost of obtaining electricity in these countries. However, this was the only region that saw a decrease in Business Environment, with the rest actually increasing their score.

Interestingly, South Africa experienced the most considerable increase, thanks to a reduction in electrical connection costs and an advanced Logistics Performance Index. India and Tanzania followed it.

3. Access to Credit

This third factor evaluates whether individuals and businesses can obtain the necessary credit to start their business at an affordable rate – a crucial requirement for facilitating entrepreneurship. For access to credit, the top indicators are the ease of procuring credit, as well as the observed affordability of financial services by individuals who are interested in starting their own business.

Around the world, there are examples of countries who are making it easier to get credit, as well as ones that are making it a lot more challenging. In the former camp is Pakistan, whose business gains in 2017 came as a result of expanded access to credit. Here, the government protected borrowers’ rights to examine their own data and the credit bureau for extending its borrower coverage.

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On the other hand, El Salvador fell considerably regarding Access to Credit as the ability for individuals to get credit diminished. Last year, El Salvador dropped 10 places in the Business Environment pillar and currently ranks 92nd overall on the Index.

4. Investor Protections

This factor calculates the vigor of rules concerning ownership and rights, especially in relation to intellectual property. For Investor Protections, the leading indicators are the perceived level of intellectual property protection and the term, price & effectiveness of insolvency resolution.

As a country, India has made significant gains in Business Environment, where it has increased its ranking by 11 spots over the past year to 51st in the world (conversely, they dropped 21 places in Social Capital). Many of these Business Environment gains have been driven by developing intellectual property rights.

On the other end of the spectrum, Qatar’s Investor Protections score has fallen, as settling insolvency issues has become more challenging and less effective. That being said, Qatar still ranks 35th in Business Environment in the world and 46th overall on the Legatum Prosperity Index 2018.

5.  Labor Market Flexibility

Last but not least, this fifth factor looks at the capacity for enterprises to adjust to new hurdles by hiring people they require, or to losing individuals and positions they no longer need, without being hindered by charges and regulations. For Labor Market Flexibility, the indicators include redundancy costs in weeks of salary and the perceived regulatory barriers to hiring and firing.

There is no denying that this factor is strongest in Western Europe where companies in countries such as the Netherlands (ranked 14th in Business Environment), Germany (ranked 12th in Business Environment), and Norway (ranked 11th in Business Environment) are having to deal with increasingly fewer administrative barriers when it comes to hiring and firing employees.

On the other side of the world, Australia (ranked 9th in Business Environment) is the sole country in the Asia-Pacific region that has raised the cost of redundancy over the past decade. Interestingly, the countries within the Asia-Pacific have the most extensive spread of overall prosperity, with New Zealand taking the number two spot and Afghanistan taking number 146. Which of these factors do you think plays the most substantial role in a country’s business environment? As a business owner or entrepreneur, which ones do you see as being crucial to assisting you in finding success? What do you think your home country is doing well, and not so well? Let us know your thoughts on the Legatum Institute Prosperity Index 2018 and its findings in the comments below.