Doing Business Blog - The World Bank Group

Kicking In An Open Door

“You never know what to expect,” a Surinamese entrepreneur said to me, describing the unpredictable situation at the port of Paramaribo (see picture). “Before we know it, we’re not allowed to enter the port area because someone woke up that morning and had the idea that we need some additional device, or piece of clothing. Everyone will be sent away off to the store to buy that piece of clothing or equipment. It is never announced in advance, it is so random that no one could see it coming. It is frustrating because we never know what to expect. When requirements change that unexpectedly, we cannot prepare for it and thus, besides the frustration of another, useless change, we lose time in getting our goods from the port, which costs us money. We’re in the port area every day, so why is it that they could not tell us before?”

This is only one example where authorities fail to communicate and the entrepreneur is directly disadvantaged. The information is nowhere to be found until an officer decides to communicate the details at a time that is convenient to him. The rule is implemented immediately without advance notice and the entrepreneur all of a sudden finds himself barred from entering the port area unless he fulfills the unforeseen requirements on the spot.

Going Portable in Phnom Penh

Up until last year, entrepreneurs in Cambodia who sought to obtain loans to expand their businesses might have found themselves coming up against a brick wall. As the country had no secured transactions law, an entrepreneur—particularly a small or medium-sized one—would likely have found himself with little to offer potential lenders in the way of collateral.

Land was acceptable as collateral—that is, if the entrepreneur was fortunate enough to own any.

Tangible movable property (such as the sewing machines of a clothing maker) was also acceptable—if the entrepreneur handed the property over to the lender. Of course, this would effectively deprive her of her business and negate the whole reason for getting a loan in the first place.

All this changed with the enactment of the country’s new Law on Secured Transactions in 2007. While Doing Business is still evaluating the impact that the new law will have on Cambodia’s score in the Legal Rights index of the Getting Credit indicator, the law looks to be a giant step forward. It creates a Filing Office within the Ministry of Commerce in which lenders can register their security interests in movable property.

What’s the Best Minimum?

It depends. However, when it comes to paid-in capital requirement the best minimum is zero. 75 economies in the Doing Business sample of 178 agree with this statement. Nevertheless, the rest do not and impose minimum paid-in capital requirement of up to 36 times the income per capita of the country. However, at least one of those 75 economies is now considering imposing a minimum paid-in capital requirement – Antigua and Barbuda.

Antigua and Barbuda currently has no minimum capital requirement. That is, the shareholders decide on how much to invest initially in the business, depending on the industry and banking financing requirements. However, the Company Registrar feels this solution is not optimal because it promotes the creation of fake companies and it does not provide enough protection to creditors. Consequently, there is a request from the registrar to raise the paid-in minimum capital requirement to EC$ 100,000 (over USD37,000 and over 3 times Antigua and Barbuda’s income per capita). Will this be a step forward?

How To Help Entrepreneurs

A recent NBER conference on International Differences in Entrepreneurship brought together two dozen researchers in this rapidly expanding field.

One of the most interesting papers at the conference was presented by Silvia Ardagna (Harvard) and Annamaria Lusradi (Dartmouth). The paper looks at what makes people decide to become entrepreneurs. In terms of personal characteristics, entrepreneurs are more likely to be male, to have a higher level of education and income, and to have more confidence in their skills and abilities and less fear of failure than other (salaried) respondents. These results are consistent with the evidence from other studies, for example a study on Brazil.

Shattering the Glass Ceiling

For many women in the developing world, it’s not the glass ceiling that prevents them from making it to the C-suite, but rather the obstacles they face along the way. The Global Entrepreneurship Monitor (GEM), which provides an annual assessment of entrepreneurial activity at the national level worldwide, found that overall there are higher rates of female entrepreneurship in developing countries than developed countries. But this distinction is borne of necessity.

The main challenges that women face are social inequality, lack of education and trouble in securing funding. A recent study by PricewaterhouseCoopers made an interesting finding; women in developing countries find it easier to break through the glass ceiling than their colleagues in the west. Samuel DiPiazza, the company’s global head said, “In some countries such as Germany and Switzerland, there are cultural and social perceptions of women that make advancement much more challenging. Whereas in the developing world, there is a huge cry for talent, where there is enormous growth, you must be able to adjust to these norms faster.”

One Strike and You're Out of Business

On October 17, 1993, 16 West African states signed a treaty known as the "Organisation pour l'Harmonisation du Droit des Affaires en Afrique" or "OHADA" (Organization for the Harmonization of Commercial Law in Africa). The objective of the organization is to promote African economic integration and attract investment to the region. In an effort to harmonize laws, the member states have adopted "Uniform Acts" in areas such as corporate law, bankruptcy, accounting and debt recovery.

In 1998, the 16 OHADA countries -- soon 17 when DRC Congo joins the club -- adopted a "Uniform Act on General Commercial Law" which governs business registration. Article 10 of the Act states that "people who have been convicted of a crime as well as people who have been imprisoned for at least 3 months for committing economic or financial offenses are excluded from becoming an entrepreneur." This provision was meant to protect society by excluding criminals from doing business.

The Doing Business project counts 24 countries (out of 178) that still require company founders to submit a criminal record when they want to register their business. Out of the 24, 16 are the OHADA member countries. The remaining 8 are Algeria, Kuwait, Burundi, Djibouti, Macedonia FYR, Slovakia, St Kitts, and the Czech Republic. In Kuwait, for example, you cannot even hold shares in a company without a clean criminal record. These laws sharply contrast with countries like the United States and the United Kingdom where some cities have training programs and give financial support to convicts -- while still in prison --to help them start a business when they get out.

Easy Access to Credit - Makes for Ugly Buildings?

Lacking credit can be good. Just visit old Sana'a, Yemen - a UNESCO cultural heritage site.

The gingerbread-like houses look like the making of a whimsical architect. In fact, their unique design is due to a lack of credit. Instead of building a four-storey house, Sana'a families build in stages. First floor first, and live there. Once they save enough money, a second floor is built. And so on. It has taken centuries to get to the current look. Had easy access to credit been available, old Sana'a houses could have looked like the IFC Washington DC building.

Still, lack of credit is bad for doing business. The merchants in old Sana'a can attest to that. Their tiny stores can barely fit all the wares. This may change soon. The Central Bank of Yemen is considering a reform of its credit registry. How would this help? The presence of good credit registries is shown to increase access to capital, especially for new and small businesses. This is documented in a recent article in the Journal of Financial Economics, by Simeon Djankov, Caralee McLiesh and Andrei Shleifer (Harvard).

Getting the Power of the Entrepreneurial Spirit

Is entrepreneurial spirit innate or can you cultivate it? This question is central to economic development since entrepreneurs create most new jobs, invest in the newest technologies, and build successful businesses. Schumpeter, the biggest advocate of its importance, coined the (German) term Unternehmergeist, meaning entrepreneurial spirit. Not surprisingly, the term didn't stick, but the idea did.

Still, Schumpeter did not say what a government can do to encourage entrepreneurs. Neither did any of the notable economists after him. A recent study by Harvard academics and Doing Business researchers may have an answer: "Our data reveal a consistent and large adverse effect of corporate taxation on both investment and entrepreneurship. A 10 percentage point increase in the effective corporate tax rate reduces the investment to GDP ratio by about 2 percentage points (mean is 21%), and the entry rate of new businesses by 1.3 percentage points (mean is 8%)." The study also shows that simpler procedures for starting a business and more flexible labor regulations are associated with more entrepreneurship.

Another study, by Berkeley academics and Doing Business researchers, finds that entrepreneurs share one main characteristic: their family has many entrepreneurs and, with high probability, their childhood friends are also entrepreneurs. In other words, it is the social and family environment that nurtutes the entrepreneurial spirit.

What do you think? How does one get the Unternehmergeist?