What does it take to succeed in business? A groundbreaking idea? A sizeable capital?
New businesses always face an uphill battle, especially during the first few years.
As much as 20 percent of new companies close during the first year. That number increases to 30 percent in year two. And by the fifth year, as much as 50 percent of companies close shop. Among the top reasons for business closures are the lack of need for the products or services offered, running out of capital, poor management, and competition.
But apart from internal factors and market forces, one key area prospective business owners and their investors should seriously look at is a country’s business environment.
Defining ‘business environment’
But what, exactly, does the term ‘business environment’ refer to, and what is its impact on companies and countries?
According to Legatum, a country’s business environment is one of the critical factors that determines its prosperity. When a country has a robust business environment, more entrepreneurs are encouraged to start their own business, stimulating them to act upon new ideas and to pursue available opportunities.
What are the critical factors needed to determine whether a country has a healthy business environment?
1. Entrepreneurial environment
This factor looks into how easy it is to start and run a business as well as how easy it is to get ahead.
In the latest Prosperity Index, Legatum noted how Oman’s policies of removing the requirement to pay minimum capital within three months and the streamlining of employee registration have benefited businesses.
On the converse side of the coin, Japan, which has been traditionally recognized for its business culture, ranks 137th, well below expectations, due to its restrictive policies regarding starting a business.
2. Business infrastructure
This factor assesses a country’s accessibility to various infrastructure. Among the indicators included in the assessment are the cost of obtaining electricity connection, logistical performance, and broadband subscription rates.
In the latest Legatum report, South Africa was able to post a remarkable growth rate in this area by reducing the costs involved in obtaining electricity connection as well as by improving its logistics performance index.
On the other hand, countries from Latin America and the Caribbean performed poorly in this category due to the high price of obtaining electricity.
3. Access to credit
Access to credit evaluates how easy it is for aspiring entrepreneurs and existing businesses to get hold of funding as well as the perceived affordability of related services.
Legatum cites Pakistan’s gains in the report which were anchored upon the country’s effort to make borrowers’ data transparent coupled with the effort to expand borrower coverage.
In contrast, El Salvador has plummeted in this category because its ease of credit score has grown worse.
4. Investor protection
Investor protection covers matters involving ownership and rights, specifically those that involve intellectual property.
India posted massive growth in this area by focusing on improving intellectual property rights. In contrast, Qatar’s score in this area plummeted because it made it difficult for parties to resolve insolvency issues.
5. Labor market flexibility
Labor market flexibility evaluates the ability of businesses in a country to adapt to challenges related to the workforce. These include the ability to face new challenges by recruiting new hires and letting go of workers who are no longer needed without being hampered by regulations and costs.
Germany, Norway, and the Netherlands posted remarkable growth in this area by minimizing regulatory barriers related to both the hiring and firing of employees.
On the other hand, Australia trailed its peers in the Asia-Pacific region in this category due to its imposition of additional costs for redundancy.
A foundation for prosperity
Each country’s business environment is an essential indicator in evaluating its prosperity. When aspiring entrepreneurs are empowered and are enabled to gain access to the resources they need to act upon innovative ideas, the country benefits as well through increased wealth and improved social wellbeing.
According to Legatum, the business environment is one of the nine pillars that has shown remarkable growth over the last ten years, increasing well above 10 percent. This means that aspiring business owners and investors have an easier time setting up their companies while receiving ample protection in critical areas like property rights and insolvency issues.
The Prosperity Index
Unlike the traditional measurement of a country’s prosperity, the Legatum Prosperity Index evaluates a country’s wealth as well as the well-being of its citizens.
The countries included in the index are each given a score for each of the pillars. The scores for the pillars are then averaged in order to get a final prosperity score as well as determine the rank of a particular country in terms of the index.
These pillars include:
- Economic quality
- Governance
- Education
- Health
- Safety and security
- Personal freedom
- Social capital
- Natural environment
- Business environment
The Legatum Institute is an international think tank and charity based in London. It seeks to provide evidence-based solutions to individuals and groups that seek to create just and flourishing societies.