China vs India: Where is it Better for Doing Business?

The Ease of Doing Business Index is an index of 183 countries created by the World Bank. Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights.

The index is based on the study of laws and regulations, with the input and verification by more than 8,000 government officials, lawyers, business consultants, accountants and other professionals in 183 economies who routinely advise on or administer legal and regulatory requirements.

The Ease of Doing Business Index is meant to measure regulations directly affecting businesses and does not directly measure more general conditions such as a nation’s proximity to large markets, quality of infrastructure, inflation, or crime. For example, according to the Doing Business 2010 Report, which includes the Ease of Doing Business Index, Australia is ranked third on the first subindex “Starting a business” behind only New Zealand and Canada.

In Australia there are 2 procedures required to start a business which take on average 2 days to complete. The official cost is 0.8% of the gross national income per capita. There is no minimum capital requirement. By contrast, in Guinea-Bissau which is ranked among the worst (183nd out of 183) on this same subindex, there are 16 procedures required to start a business taking 213 days to complete. The official cost is 323.0% of the gross national income per capita. A minimum capital investment of 1006.6% of the gross national income per capita is required.

While fewer and simpler regulations often imply higher rankings, this is not always the case. Protecting the rights of creditors and investors, as well as establishing or upgrading property and credit registries, may mean that more regulation is needed. Moving from the worst one-fourth of nations to the best one-fourth implies a 2.3 percentage point increase in annual growth.

The various subcomponents of the index in themselves provide concrete suggestions for improvement. Many of the components may be relatively easy to implement and uncontroversial. As such, the index has influenced many nations to change their regulations so as to improve their position on the index, for example, getting to be a top 25. Between June 2008 and May 2009, the Doing Business Report recorded 287 reforms in 131 economies, 20% more than in the year before. The 10 top reformers were Rwanda, Kyrgyz Republic, Macedonia, Belarus, United Arab Emirates, Moldova, Colombia, Tajikistan, Egypt, Arab Rep.and Liberia.

The correlations between the subindices are low, which suggest that countries rarely score universally well or universally badly on the indicators. In other words, there is usually much room for partial reform even in the best ranking nations. The annual Reformers’ Club event brings together individuals from top reformer countries who have been instrumental in initiating and implementing business environment reform. These reformers are acknowledged for their success in improving the ease of doing business in their country.

Other, and somewhat similar, annual reports are the Indices of Economic Freedom and the Global Competitiveness Report. They, especially the later, look at many more factors that affect economic growth, like inflation and infrastructure. These factors may, however, be more subjective and diffuse since many are measured using surveys, and they may be more difficult to change quickly compared to regulations.

In 2008 the World Bank Group’s Independent Evaluation Group, a semi-independent watchdog within the World Bank Group, published an evaluation of the Doing Business Index. The report, titled Doing Business: An Independent Evaluation, contained both praise and criticism of the Doing Business project. The report recommended that Doing Business be clearer about what is and is not measured, disclose changes to published data, recruit more informants, and simplify the Paying Taxes Indicator.

A study commissioned by the Norwegian government alleges methodological weaknesses, an uncertainty in the ability of the indicators to capture the underlying business climate, and a general worry that many countries may find it easier to change their ranking in the Doing Business Report than to change the underlying business environment.

In an article by Peter Kusek, Investment Policy Officer with Investment Climate Advisory Services of the World Bank Group, writes: The Doing Business seventh annual report for 2010, which includes its flagship Ease of Doing Business rankings, once again has the top four positions filled by high-income economies such as Singapore, New Zealand, Hong Kong (China) and the United States. That’s not a surprise.   

However, not expected was to find countries such as Georgia, Saudi Arabia or Mauritius among the top 20.  Does this mean that these countries are amongst the world’s 20 most desirable and attractive business destinations?  Well, yes and no, depending on how you define attractiveness.  Let’s do the following quick business exercise: I am an investor looking to expand my enterprise and venture beyond the borders of my country. 

All my buddies are telling me that China and India are the places to go, but before I follow their advice I decide to snoop around the Internet and see what other folks are saying.  As I expected, there is information abound so I decide to restrict my search, and only check out various lists of countries which rank in the world markets based on their business attractiveness.  Still, there are too many so I zero in on the following six comparison lists which seem to come up most often in the search:

  • Global Competitiveness Index from the World Economic Forum: The most comprehensive of our indices and includes hard data as well as business opinions on a range of issues including institutions, labor, infrastructure and health. It does not have a specific business focus, but rather it assesses the ability of countries to provide high levels of prosperity to their citizens.
  • Ease of Doing Business Index from the Doing Business project at the World Bank Group:  Measures the quality of regulations and efficiency of business-government transactions for domestically owned small and medium-size enterprises (SMEs). It does not measure macroeconomic conditions, corruption, cost of labor and capital, or other factors which affect the likely profitability of new business ventures.
  • Index of Economic Freedom from the Heritage Foundation:  Covers ten areas including trade freedom, business freedom, investment freedom, and property rights. It relies on secondary sources of information rather than business interviews.
  • Business Environment Rankings of the Economist Intelligence Unit: Examine ten separate criteria covering the political environment, macroeconomic environment, market opportunities, policy towards free enterprise and competition, and others.
  • FDI Confidence Index from A.T. Kearney: Based on a survey of top executives who are asked about the future prospects for foreign direct investment (FDI) in each of the measured countries.
  • World Competitiveness Yearbook by IMD: Looks at five main areas of economic performance, government efficiency, business efficiency and infrastructure.

Now, comparing China and India in these rankings, and including Brazil and Russia to cover all four BRICs: I am just going to create a simple table (without correlating or standardizing the data) showing the position of these countries on each of the rankings.

 

On one hand, the FDI Confidence Index tells me that there is no better place in the world to go than China.  On the other hand China is towards the bottom of the Index of Economic Freedom, and Doing Business puts it somewhere in the middle of their distribution.  Russia is a clear loser on most of these rankings with the exception of Doing Business, which places it above both India and Brazil. 

India scores worst on the Doing Business rankings, yet all other rankings think it’s the second best BRIC country to go right after China.  In several of the rankings China is at the top and Russia at the bottom.  In the Business Environment rankings, these two countries are in the middle and Brazil is the best and India the worst performer of the four countries.

Peter Kusek continues: So who is wrong and who is right?  They are all right in their own way: We are sort of comparing apples and oranges.  While our six lists of rankings all measure some aspect of business attractiveness, they all come at it from a different angle and it’s these differences in methodology that are really key in interpreting results.  Some focus specifically on foreign investment while others examine the quality of business conditions for all enterprises.  So what are we learning from all this?

One key lesson surely is that we should not blindly trust any set of indicators and country rankings that might result from them.  Indicators are exactly what their name says they are—data which are only indicative, rather than definitive in measuring a particular issue.  Each of these six comparative indices have their own unique methodology and target audience, and conflating all of them together will usually muddle the picture instead of adding clarity.  Business people, governments and academics should be prudent in using these numbers beyond their intended purpose and in extrapolating far-reaching conclusions about how countries actually compare to one another.

So is China or India the better place for my business?  Well, I am not sure; more research is needed.

The Doing Business Report is a controversial study, with passionate critics and devoted fans. As recognized by the Independent Evaluation Group of the World Bank, “ Some have questioned the reliability and objectivity of its measurements. Others doubt the relevance of the issues it addresses or fear it may unduly dominate countries reform agendas at the expense of more crucial development objectives. And the attention given to the indicators may inadvertently signal that the World Bank Group values less burdensome business regulations more highly than its other strategies for poverty reduction and sustainable development.