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A Guide to Doing Business Abroad

Your company may be looking abroad for opportunities. The World Bank’s recent Doing Business 2010 report provides valuable insight into the best and worst places to operate around the world. Here are highlights of the survey, as well as a resource for businesses that want to start exporting, and a look at what successful reforming countries have in common.

FOCUS ON THREE CRITICAL AREAS

If you’ve ever considered doing business internationally, or if your company already operates in another country but is considering new markets, the annual Doing Business report from the World Bank and International Finance Corporation can be a handy road map.

The most recent report, Doing Business 2010: Reforming Through Difficult Times, may be useful as companies still reeling from the recession look for opportunities to help rebound. The survey doesn’t specifically track the strength of the world’s economies, but it does rate regulations and reforms. Of course, reforms aren’t a cure for an ailing economy, per se, but a country ’s regulatory environment influences how well companies can take advantage of opportunities that arise during a turnaround.

The report measures reforms that enable countries to recover from economic crisis. A large effect of the current recession is high unemployment. The best prospects for job creation, according to the survey’s lead researcher, are offered by small and medium sized enterprises – the focus of the annual study. Policymakers recognize this and either leave those enterprises alone or institute reforms that make it easier for them to operate, the researcher says.

The report does not analyze all aspects of the business environment that matter to companies and investors. Fundamentally, it measures ten indicators that apply to all businesses during their typical life cycles. Researchers assess:

Starting a business;
Obtaining construction permits;
Employing workers;
Registering property;
Getting credit;
Protecting investors;
Paying taxes;
Trading across borders;
Enforcing contracts; and
Closing a business.

For the fourth consecutive year, Singapore took the top spot for overall ease of doing business, followed by New Zealand, Hong Kong, the United States and Britain. (See the Top-10 chart at the bottom of this article.)

Despite the global financial crisis, there were a record 287 reforms in 131 of the 183 economies in the study. That was a 20 percent jump from the year before and the largest number since the surveys began in 2004.

The willingness of governments to continue reforms during a tough economy bolsters the prospects for a global recovery, particularly as the majority of reforms were in these areas that are crucial to a turnaround:

Transparency and efficient business regulations, which make it easier for established enterprises to reorient themselves and for new companies to start up.

Efficient court and bankruptcy procedures that help ensure a quick reallocation of assets.

Strong property rights and investor protections that can help gain investors’ trust when they start spending again.

Here is an overview of three critical areas as well as the top ten countries in each.

BUSINESS WISDOM FOR TODAY’S ECONOMY

At export.gov, federal government agencies provide resources to assist American businesses with international strategies. At the site, you can find a library of guides that offer information on export and investment opportunities in specific countries and regions.

Common Traits Among Reformers

Doing Business researchers noticed some features among reforming economies that can help gauge how suitable a country might be for your operations. Successful reformers tend to:

Follow a long-term agenda aimed at increasing the competitiveness of their firms and economy.

Stay proactive and consistent in reforming.

Implement broad-based changes that cover a significant number of the ten indicators measured by the survey.

Involve all relevant public agencies and private sector representatives and institutionalize reform at the highest level. 5. Stay focused because of long-term vision supported by specific goals.

STARTING A BUSINESS

TOP TEN

New Zealand

Canada

Australia

Singapore

Georgia

Macedonia

Belarus

U.S.

Ireland

Mauritius

This category identifies the bureaucratic and legal hurdles involved in incorporating and registering a company with up to 50 employees and start-up capital of 10 times the economy’s per-capita gross national income.

The procedures include obtaining necessary licenses and permits and completing required notifications, verifications or inscriptions for the company and employees.

Researchers excluded anything specific to an industry as well as the processes involved in connecting to utilities. Lawful shortcuts were counted.

The hypothetical business was a limited liability company that performed general industrial or commercial activities, such as the production or sale of products or services to the public. The business operated in the country’s most populous city, was not involved in foreign trade, didn’t handle products subject to special taxes and didn’t require heavily polluting processes.

CLOSING A BUSINESS

TOP TEN

Japan

Singapore

Norway

Canada

Finland

Ireland

Denmark

Belgium

U.K.

Netherlands

This category identifies weaknesses in bankruptcy laws and the main procedural and administrative bottlenecks in the process. The primary indicators used in the survey were the average time to complete the case, the cost of proceedings, and the recovery rate, or how many cents on the dollar creditors collected.

In the hypothetical case, a hotel defaults on a bank loan after a 2008 loss generated a negative net worth and the company projected losses for 2009 and 2010. The business had too many creditors to negotiate an out-of-court settlement, so its options were to reorganize, liquidate or go through a foreclosure or other debt enforcement process aimed at selling the business piece by piece or as a going concern.

The business was assumed to be a limited liability company with 201 employees and 50 suppliers, each of which was owed money for the last delivery. It was 100 percent domestically owned and the founder, who was also chairman of the supervisory board, owned 51 percent. No other shareholder owned more than five percent.

The company took out a 10-year loan five years ago using the hotel as collateral and kept up payments until the default. The organization had a mortgage with the principal equal to the market value of the hotel.

PROTECTING INVESTORS

TOP TEN

New Zealand

Singapore

Hong Kong

Malaysia

U.S.

Ireland

Canada

Israel

Colombia

U.K.

The Doing Business report also measures the strength of minority shareholder protections against directors’ misuse of corporate assets for personal gain.

The researchers used a hypothetical transaction in which a publicly traded food manufacturer with its own distribution network acquired a fleet of trucks from a troubled chain of retail hardware stores. The purchase price represented 10 percent of the acquiring company’s assets and exceeded the vehicles’ market value.

The purchasing company was 60 percent owned by “Mr. James,” who also owned 90 percent of the hardware chain. Mr. James was the controlling director of the acquiring company and elected two of the other directors to its five-member board.

The transaction wasn’t fraudulent but was unfair to the company buying the fleet. Shareholders sued Mr. James and others who approved the purchase.

Given this scenario, the researchers measured various components to produce the following three indices:

Extent of Disclosure;
Extent of Director Liability; and
Ease of Shareholder Lawsuits.