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CID Working Paper No. 211

How Business is Done and the 'Doing Business' Indicators: The Investment Climate when Firms have Climate Control

Mary Hallward-Driemeier, Lant Pritchett

November, 2010

Abstract

"Doing Business" (DB) provides measures of the time and costs associated with fully complying with an array of business regulations. Enterprise Surveys (ES) ask a wide range of firms about their actual experiences in doing business. We use three comparable indicators in both: time to get an operating permit, time to get a construction permit, and time to import goods, to compare these distinct de jure(DB) and de facto(ES) approaches to assessing the "investment climate" in over 100 countries. Four patterns emerge in each of the three indicators. First, while the DB, of necessity, reports a single estimate of the days for compliance for each indicator, firms in the same country report wildly different times to complete the same transaction. For instance, the DB indicators says it takes 65 days to start a business in Ecuador, whereas the distribution of the 265 firms who reported getting an operating license was between a 10th percentile reporting 1 day while the 90th percentile reporting 60 days. Second, regulatory compliance appears to be "under water" as firms report actual times much less than the DB reported days. For instance, the median DB time to obtain a construction permit across all countries is 210 days, while the mean of the days firms reported was 59, the median DB-ES "under water" gap was 145 days. Third, cross-nationally there is very little association between the ES distributions and DB numbers. A naïve view of "full compliance" might suggest that actually reported days would rise one for one with DB days, but the patterns are much more complex. The de jureenvironment appears to only affect some firms. For instance, as the de jureDB time to get a construction permit rose across countries by 524 days (from 77 to 601) the predicted time reported by the 25th percentile "favored" firm rose by just 2.7 days. In contrast, the time reported by the "disfavored" 90th percentile firm rose by 130 days, but all of this rise comes in the lower range of the DB. Fourth, for those countries with multiple ES surveys we find little association over time, with reductionsin DB days as likely to be accompanied by increasesin ES days. Comparing these two measures suggests very different ways of thinking about policy versus policy implementation, about what "climate" means, and what the options for "policy reform" really are.

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