This indicator measures the time and cost of complying with all procedures officially required for an entrepreneur to start up and formally operate an industrial or commercial business.
Relationship to Growth & Poverty Reduction
The ability to start a business is important for encouraging entrepreneurship and economic growth. 1 Easing business entry into the formal economy can reduce unemployment, encourage investment, expand the tax base, help small entrepreneurs to access bank credit, allow workers to enjoy health insurance and pension benefits, and enable businesses to achieve economies of scale. 2 Research shows that formally registered businesses grow to more efficient sizes because they do not operate in fear of the authorities. 3 The International Finance Corporation has found that business start-up reforms “can add between a quarter and a half a percentage point to growth rates in the average developing economy.” 3 Cost-related barriers to starting a business are particularly regressive in that they deny economic opportunities to the poor due to their low levels of liquid capital. 5
The Business Start-Up composite indicator is calculated as the average of two indicators:
- Days to Start a Business: This component measures the number of calendar days it takes to comply with all procedures that are officially required for an entrepreneur to start up and formally operate an industrial or commercial business. These include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with relevant authorities.
- Cost of Starting a Business: This component measures the cost of starting a business as a percentage of country’s per capita income. The IFC records all procedures that are officially required for an entrepreneur to start up and formally operate an industrial or commercial business. These include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with relevant authorities.
Local lawyers and other professionals examine specific regulations that impact the time and cost of opening a new business. The local lawyers and/or other professionals are instructed to record all generic procedures that are officially required for entrepreneur to start up an industrial or commercial business. These include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions with relevant authorities. After a study of laws, regulations and publicly available information on business entry, a detailed list of procedures, time, cost and paid-in minimum capital requirements is developed. Subsequently, local incorporation lawyers and government officials complete and verify the data on applicable procedures, the time and cost of complying with each procedure under normal circumstances and the paid-in minimum capital. On average four law firms participate in each country. Information is also collected on the sequence in which procedures are to be completed and whether procedures may be carried out simultaneously. It is assumed that any required information is readily available and that all government and non-government agencies involved in the start-up process function efficiently and without corruption. If answers by local experts differ, inquiries continue until the data are reconciled.
To make the data comparable across countries, several assumptions about the business and the procedures are used. The business:
- is a limited liability company; if there is more than one type of limited liability company in the country, the most popular limited liability form among domestic firms is chosen. Information on the most popular form is obtained from incorporation lawyers or the statistical office;
- operates in the country’s most populous city;
- is 100% domestically owned and has five owners, none of whom is a legal entity;
- has start-up capital of 10 times income per capita, paid in cash;
- performs general industrial or commercial activities, such as the production or sale of products or services to the public; it does not perform foreign trade activities and does not handle products subject to a special tax regime, for example, liquor or tobacco; the business is not using heavily polluting production processes;
- leases the commercial plant and offices and is not a proprietor of real estate;
- does not qualify for investment incentives or any special benefits;
- has up to 50 employees one month after the commencement of operations, all of them nationals;
- has a turnover at least 100 times income per capita; and
- has a company deed 10 pages long.
It is assumed that the minimum time required per procedure is one calendar day. Time captures the median duration that incorporation lawyers indicate is necessary to complete a procedure. Although procedures may take place simultaneously, they cannot start on the same day (that is, simultaneous procedures start on consecutive days). A procedure is considered completed once the company has received the final document, such as the company registration certificate or tax number. If a procedure can be accelerated for an additional cost, the fastest procedure is chosen. It is assumed that the entrepreneur does not waste time and commits to completing each remaining procedure without delay. The time that the entrepreneur spends on gathering information is ignored. It is assumed that the entrepreneur is aware of all entry regulations and their sequence from the beginning.
The text of the company law, the commercial code and specific regulations and fee schedules are used as sources for calculating the cost of start-up. If there are conflicting sources and the laws are not clear, the most authoritative source is used. The constitution supersedes the company law, and the law prevails over regulations and decrees. If conflicting sources are of the same rank, the source indicating the most costly procedure is used, since an entrepreneur never second-guesses a government official. In the absence of fee schedules, a government officer’s estimate is taken as an official source. In the absence of a government officer’s estimate, estimates of incorporation lawyers are used. If several incorporation lawyers provide different estimates, the median reported value is applied. In all cases the cost excludes bribes.
- 1. World Bank. 2006. Doing Business 2007: How to Reform. Washington D.C.: World Bank. Djankov, Simeon, Rafael La Porta, Florencio Lopez de Silanes, and Andrei Shleifer. 2002. Regulation of Entry. Quarterly Journal of Economics 117: 1-37. De Soto, H. 1998. The Other Path: The Invisible Revolution in the Third World. New York: Harper Collins. De Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books. Klapper, Leora, Luc Laeven, and Raghuram Rajan. 2006. Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics 82(3): 591-629.
- 2. World Bank. 2005. Doing Business in 2005: Removing Obstacles to Growth. Washington D.C.: World Bank. Djankov, Simeon, Rafael La Porta, Florencio Lopez de Silanes, and Andrei Shleifer. 2002. Regulation of Entry. Quarterly Journal of Economics 117: 1-37. Mauro, Paolo. 1995. Corruption and Growth. Quarterly Journal of Economics 110: 681-712. Baum, Matthew A., and David A. Lake. 2003. The Political Economy of Growth: Democracy and Human Capital. American Journal of Political Science 47(2): 333-347. Schneider, Friedrich and Dominik Enste. 2000. Shadow economies: Size, causes, and consequences. The Journal of Economic Literature 38(1): 77-114. Schneider, F., Enste D. 2002. The Shadow Economy: Theoretical Approaches, Empirical Studies, and Political Implications. Cambridge, UK: Cambridge University Press. Alesina, Alberto, Silvia Ardagna, Giuseppe Nicoletti, and Fabio Schiantarelli. 2005. Regulation and Investment. Journal of the European Economic Association 3: 791-825. Fonseca R., P. Lopez-Garcia and C.A. Pissarides. 2001. Entrepreneurship, Start-up Costs and Employment. European Economic Review 45: 692-705. Bertrand, Marianne, and Francis Kramarz. 2002. Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry. Quarterly Journal of Economics 117(4): 1369-1414. According to the Doing Business in 2005 report, “coupled with additional reforms, reductions in the cost of starting a business can yield even higher economic returns. A study by the World Bank shows that trade openness contributes about 0.4 percentage points annual economic growth in countries where labor markets are flexible and business start-up is easy. Why? Because trade enhances growth by channeling resources to their most productive uses in the economy. But if such resource movement is encumbered by high entry barriers, the effects of trade diminish and can even be reversed. This explains the negative effects of trade liberalization in some Latin American countries, where entry is difficult and labor markets inflexible.”
- 3. World Bank. 2005. Doing Business in 2005: Removing Obstacles to Growth. Washington D.C.: World Bank.
- 4. World Bank. 2005. Doing Business in 2005: Removing Obstacles to Growth. Washington D.C.: World Bank.
- 5. De Soto, H. 1998. The Other Path: The Invisible Revolution in the Third World, New York: Harper Collins.