The Impact of the Business Environment on the Business Creation Process

New data from the 2008 World Bank Group Entrepreneurship Survey indicates a very strong and statistically significant relationship between entrepreneurship and a better business environment. Data for 100 countries on the number of total and newly registered corporations over an eight-year period (2000-2007) were collected directly from registrars of companies around the world. Data were also collected on the functioning and structure of business registries. Empirical evidence suggests that greater ease in starting a business and better governance are associated with increased entrepreneurial activity. After controlling for economic development (gross domestic product per capita), higher entrepreneurial activity is significantly associated with cheaper, more efficient business registration procedures and better governance. Although the degree of progress in the modernization of business registries varies greatly, countries usually have a common goal to evolve from a paper-based business registry to a one-stop, automated, web-enabled registry capable of delivering products and services online via transactions involving authenticated users and documents. Tests show that business registry modernization (often a component of broader private sector reforms) has a positive impact not only on the ease of creating a business, but also on new business registration. Overall, the data show that a quick, efficient, and cost-effective business registration process is critical for fostering formal sector entrepreneurship.


Introduction
Following the G20 summit on November 15, 2008, the leaders of the world's largest economies issued a statement explaining how they intended to restructure the world's economic architecture. On the very first page of this statement, they stated: "Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction." This statement highlights the relevance of entrepreneurship as a force behind economic development. It is therefore critical that governments be able to measure and understand the entrepreneurial activity of their countries. However, the mere concept of entrepreneurship, and how to measure it, still lacks a common language among scholars and academia.
The World Bank Entrepreneurship Survey (WBGES) was conceived to answer the demand of scholars and government for a reliable and internationally comparable indicator to measure entrepreneurial activity. In its third year, data for 100 countries were collected directly from the registrars of companies around the world on the number of total and newly registered corporations over an eight-year period (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007).
The WBGES data continue to show that a good regulatory environment can boost entrepreneurial activity in developing countries. After controlling for economic development (GDP per capita), higher entrepreneurial activity is significantly associated with cheaper, more efficient business registration procedures (Doing Business, 2009) and better governance (Kaufmann and others, 2008).
The 2008 WBGES includes new data on the impact of modernization of business registries on business creation. It gathers extensive data on the functioning and structure of business registries in 71 countries from the registrar of companies. The data show that registry modernization is associated with shorter incorporation time and markedly lower cost of entry, thus reducing barriers to formal business formation and entrepreneurial activity, and relatively higher business entry rates. While the degree of progress in the modernization of business registries varies greatly, countries usually have a common goal to evolve from a paper-based business registry to a one-stop, automated, web-enabled registry capable of delivering products and services online via transactions involving authenticated users and documents. Our tests show that business registry modernization (often a component of broader private sector reforms) has a positive impact not only on the ease of creating a business, but also on new business registration. Overall, the data show that a quick, efficient and cost-effective business registration process is critical to fostering formal sector entrepreneurship.

Methodology overview
The WBGES aims to understand the dynamics of private enterprises around the world through the collection of data on business creation at the international level that can be compared across heterogeneous legal, economic, and political systems. In order to make data comparable, the WBGES strives to define a unit of measurement, source of information, and concept of entrepreneurship applicable and available among the diverse countries surveyed. The definition of entrepreneurship used in the survey limits findings to the formal sector. This is because of the difficulties of quantifying the number of firms that compose the informal sector, and is no reflection on its relevance for developing economies. Moreover, previous literature highlights the potential advantages of formal sector participation, including police and judicial protection (and less vulnerability to corruption and the demand for bribes), access to formal credit institutions, the ability to use formal labor contracts, and greater access to foreign markets. Additionally, some firms that choose to stay informal might be unable to realize their full growth potential.
The WBGES data on formal business creation permit the study of regulatory, political, and macroeconomic institutional changes on entrepreneurship. The data also facilitate the analysis of the growth of the formal private sector, relative to the informal sector, and the identification of factors that encourage firms to begin operations in or transition to the formal sector.
While there are numerous established definitions for entrepreneurship, the concept stills lacks a common language. Furthermore, many of the current definitions focus disproportionately on industrialized countries, highlighting the assumption of risks, innovation, and high growth as necessary characteristics of entrepreneurial activity.
These characteristics are typical of entrepreneurship in industrialized countries, but might be difficult to measure in developing countries. Therefore, to make the data comparable across a large number of countries, the specific type of business measured is simply the number of limited liability corporations, or its equivalent in other legal systems.
The main sources of information for this study are the national business registries. 1 In a limited number of cases where the business registry was unable to provide the data-usually because they do not keep business registrations digitalizedthe WBGES used alternatives sources, such as statistical agencies, tax and labor agencies, chambers of commerce, and private vendors (such as Dun & Bradstreet). Given that business registration is the first step to entering the formal sector, the WBGES also gathered information on the registries' functioning and structure to better understand their role in the business creation process.
The collection process involved telephone interviews and email/fax correspondence with business registries in over 120 countries; 112 countries responded to the survey in 2008 and data from 101countries was considered accurate and comparable according to the WBGES methodology.
The WBGES aims to provide an indicator of entrepreneurship based on an objective measure of business creation. Its nature makes the WBGES an appropriate indicator to measure the impact of regulatory, political, and macroeconomic institutional changes on the private sector, therefore becoming a valuable tool for policy making. Despite effort to minimize disparities and make the data comparable across countries, certain limitations preclude a completely systematic analysis of entrepreneurial development. The following represent the most frequently faced problems in the process of gathering and processing the data:  Data availability. Several countries were only able to provide data on newly registered companies-and not able to provide data on total registered companies-since recent registration information is stored electronically, but historical data was not digitalized. Some countries were excluded from this survey because they lacked tools or resources to measure business registration. For instance, some countries have decentralized business registries that make aggregation at the national level extremely difficult. In other cases, the data are archived only in paper format.  Limitations regarding data on firm closures. Although approximately 80 percent of surveyed countries require businesses to report closures, only a few were actually able to report the number of business closures. The reasons differ from country to country, but are mainly due to the fact that the registrars generally have no enforcement mechanisms to compel businesses to report closures. In other cases, the number of closed businesses was reported may be imprecise because only a low percentage of reporting businesses. Although the number of closed companies is essential to paint a clear picture of the economic and entrepreneurial activities of a country, it is not yet feasible to obtain comparable data.
In this regard, while information on "active" companies-excluding closed or inoperative businesses-is sometimes available from national tax agencies and labor ministries, the research shows that only a low number of countries can actually provide this data. Therefore, it was decided to focus on the business registries. Yet, this is an important indicator of private sector activity for business registrars to measure.  Shell corporations. Shell companies are defined as companies that are registered for tax purposes, but are not active businesses. These corporations do not fit into  Diverse methodologies. Some of the data collected by the WBGES 2008 might differ from official data published by individual countries. The reason for this is that local statistical agencies might use a different methodology. For instance, the European Statistical Agency (Eurostat) methodology is based on the minimum number of employees to measure entrepreneurship. As a result, in some cases the data published by Eurostat and the WBGES, while accurate in all cases, differs.

Data on new firm creation
The WBGES 2008 gathered data on the number of new and total businesses for 101 countries for the time period 2000 to 2008. In order to make this data comparable across countries, three different indicators were used, each displaying a different dimension of entrepreneurship ( Figure 1): -Entry density rate: This is the indicator used to measure new firms (those that were registered in the current year) as a percentage of working age population (ages 18-65).
The data collected for 101 countries shows significant disparities across regions, ranging from 0.05% in Africa & the Middle East to 0.58% in industrialized countries.
-Business density: This is the indicator used to measure the number of businesses per capita. It is calculated as the number of total businesses (those that existed at the beginning of the given year) as a percentage of working age population (age 18-65).
Similar to the entry rate density, this indicator shows a remarkable gap between industrialized countries, with an average of 5.48%, and developing countries, with an average of 1.39%.
-Entry rate: This is the indicator used to measure the number of new businesses as a proportion of existing businesses. It is calculated as newly registered firms as a percentage of total registered firms. The data collected for 100 countries shows that this indicator presents fewer disparities across regions, ranging from 6.6% to 10%.  In addition to these indicators, the 2008 WBGES provides enough historical data to establish the trends in the number of new and total businesses in 100 countries during the eight year-period 2000 to 2008. In this regard, it is interesting to note that developing countries have a higher trend in both the number of total and new businesses, with some of the countries doubling their numbers during the period, whereas industrialized countries show little variation during the same period ( Figure 2). Interestingly, the majority of the surveyed countries with a negative business growth were those that suffered a war, civil unrest or remarkable political instability during the eight-year period. 2 2 Such as Lebanon, Bosnia and Herzegovina and Haiti.

The Impact of the Regulatory and Legal Environment
The WBGES data were merged with other variables measuring governance, political stability, the business environment, and the ease of registering a business. The data reveal interesting correlations, providing further evidence of the relevance of the regulatory and political environment in fostering entrepreneurship.

Governance
The WBGES 2008 data suggest that good governance and political stability are the first prerequisite to setting up a favorable business environment. The information collected reveals an inverse relationship between political risk and business creation, with countries with lower political risk having significant higher business entry rates.
For instance, using the average of the six Kaufmann Governance Indicators (Voice and accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption) to measure good governance, the data also shows a strong and significant relationship between higher business entry rates and better governance (Figure 3). What is more, the majority of the surveyed countries with a negative business growth were those that suffered a war, civil unrest or remarkable political instability during the eight-year period (e.g. Lebanon, Bosnia Herzegovina and Haiti).

'Red-tape' reduction
The indicator used to measure the bureaucratic and legal hurdles an entrepreneur must overcome to incorporate and register a new firm is the "Ease of Starting a Business" indicator from the Doing Business Report. Unsurprisingly, the data shows a strong relation between a cheap and fast incorporation process as measured by the Ease of Starting a Business ranking, and the number of new businesses per capita (Figure 4). 3

Legal reform
In an effort to better understand the legal forms favored by entrepreneurs and its impact on the creation of new businesses, the WBGES collected data on the main characteristics of the three prevalent legal forms per country. However, given that legal forms cannot be accurately translated across different legal systems, each legal form was dissected according to the following characteristics: registration requirements, legal entity, minimum and maximum number of shareholders, liability, transferability of shares, possibility of "going public", taxation and minimum capital requirements.
The data collected in 59 countries revealed that entrepreneurs tend to choose the simplest legal form available, usually one that requires only one shareholder and has low capital requirements. Yet, while these simplified legal forms might be adequate for single-employee establishments, they may not be suitable for the future growth of the business as they generally impose restrictions in the transferability of shares and cannot be publicly traded. Moreover, the data suggest that those countries that have more flexible legal business forms enjoy a higher entry rate density, with an average of 0.36%, al economy, while the equivalents of the tor activity and higher levels of new firm reation lead to legal reform -the evidence suggests that more flexible legal regime ncourage greater formal sector participation.
quick, efficient, and cost-effective business registry is therefore critical to enabling than those that impose more requirements, such as limitations in the number of shareholders, with an average entry density of 0.15%.
It is also notable that the equivalents of Joint Stock Companies (more rigid and usually associated with bigger businesses) prevail in developing countries, while limited- Advanced electronic business registries can also aggregate and analyze data, which can provide an important tool for market surveillance and business monitoring, such as for e ease of creating a business, but also in other aspects of the business cycle (Table 2).

tial U egistry
attracting foreign direct investment.
While the degree of progress in the modernization of business registries varies greatly, countries usually have a common goal to evolve from a paper-based business registry to a one-stop, automated, web-enabled registry capable of delivering products and services online via transactions involving authenticated users and documents. The implementation of such an electronic business registry has a positive impact not only in th social security authority official) Source: Lewin and others (2007) The data collected by the WBGES 2008 suggest a relation between the implementation of electronic registration and an increase in the number of new businesses registered. Countries like Slovenia, Guatemala, Azerbaijan Jordan, Oman, and Sri Lanka had increases of more than 30 percent in new density rates after the full implementation of electronic registries ( Figure 6). These increases cannot be attributed solely to the improvements in the countries' business registries, but it can be stated that the modernization of their business registries was the culmination of a successful implementation of regulatory reforms when taken together, produced a significant and positive impact in the ease of doing business in these countries. The data also show that the percentage of countries beginning the automation process (electronic data storage) is similar regardless of their stage of economic development (Figure 7). The differences begin to rise gradually in the next steps of the automatization process, resulting in a wide gap between industialized and developing countries in the latter steps; for example, none of the low-income countries in the survey have implemented remote or internet registration, in comparison to 50 percent of highincome countries. Multiple elements can achieve this goal. For example, registries in developing countries might start by offering entrepreneurs the ability to retreive information on a web site (such as laws and regulations), download registration forms (but not necessarily to submit them on-line), and check available firm names. Governments may need to provide a centralized interface for a regional system, such as by merging local courts' business registries into a central registry database. Countries that already have a centralized registry but are still paper-based need to digitize historical and automate new data entries by using networked computers and online forms. Registries that are already automated need to implement secure, legal authentication methods, such as digital signatures, to remove the last vestiges of in-person or in-paper requirements. Registries that aim to benefit from further time and cost-savings would interlink the electronic business with other e-Government services, such as e-Tax, e-Customs or e-Procurement applications, for additonal cost-and time-efficiencies for governments.
It is difficult to isolate the causality between the implementation of electronic registration, improvements in the business environment, and the creation of new businesses. Nevertheless, the data collected by the WBGES 2008 suggest that business registry modernization provides a more favorable business environment for starting a business and facilitates the business creation process. On average, countries with remote registration (including internet, phone, and kiosks) require over 30 percent less time to start a business, and that costs are reduced by 50 percent, as measured by the Doing Business Report (Figure 8).

Conclusions
With new topics and broader coverage of developing countries, the 2008 World Bank Group Entrepreneurship Survey and future surveys will continue to support a deeper and more comprehensive understanding of conditions that can encourage entrepreneurship, as a policy tool to measure the impact of policy reforms to create new firms and stimulate economic growth.
The WBGES findings show that those countries with the highest business entry rates provide entrepreneurs with a stable political climate, good governance, modernized business registries, reduced red tape, and simplified business legal forms. Therefore, policy makers and governments should take these variables into account to better design, implement, monitor and evaluate policies and programs aimed to develop the private sector.