40958 316 viewpoint NUMBER NOTE 2007 Entrepreneurship AUGUST Leora Klapper and Juan New Data on Business Creation and How to Promote It Manuel Quesada Delgado The World Bank Group Entrepreneurship Survey continues to extend PRESIDENCY Leora Klapper our knowledge of the importance of entrepreneurship for a dynamic (lklapper@worldbank.org) is VICE a senior financial economist economy. In its second year, with more countries participating, the in the World Bank's survey again shows a strong relationship between entrepreneurship, Development Research Group, Finance and Private Sector the business environment, and governance. New data shed light on Development Team. Juan how the distribution of businesses among sectors varies by level of DEVELOPMENT Manuel Quesada Delgado development. And analysis of new data on business registration (jmquesada@worldbank.org) is an attorney and suggests that automation can greatly reduce the barriers to SECTOR consultant in the World starting a business. This finding makes a strong case for pursuing Bank's Public Sector Unit. e-government initiatives to spur entrepreneurship. PRIVATE In 2006 the World Bank AND Group launched its first The 2007 World Bank Group Entrepreneur- Update on entrepreneurship international survey on ship Survey gathered data from 84 developing The key indicator of entrepreneurship is the entrepreneurship and economic development and industrial countries on existing and new entry rate, defined as new firms (those that were FINANCIAL (Klapper 2006). In 2007 the businesses in the period from 2000 to 2005.1 registered in the current year) as a percentage survey gained an improved For every year for which data were available, of lagged total registered firms. Average entry methodology, greater the survey recorded the year-end stock of total rates in developing regions have remained participation by developing registered firms and new firms registered in between 7 and 9 percent (figure 1). In contrast, countries, and new data the calendar year. business density, the number of registered firms GROUP topics. This Note summarizes Thanks to improvements in the methodol- as a percentage of the active population (those the revisions to the ogy and greater participation by developing ages 15­64), varies greatly across regions. BANK methodology and survey countries, this second survey provides data that The highest entry rates--those above 15 instrument, the updated are of higher quality and greater comparability percent--are found in industrial countries in database, and the key across countries. The improvements have both Western Europe and in New Zealand (figure 2). findings. expanded our understanding of entrepreneur- The lowest rates are found in countries in Africa, WORLD ship and reinforced the findings of the 2006 South Asia, and Latin America. survey on the impact of business creation on Consistent with earlier findings (Klapper THE economic development. 2006), a strong relationship emerges between E N T R E P R E N E U R S H I P N E W D A T A O N B U S I N E S S C R E A T I O N A N D H O W T O P R O M O T E I T Entry rate and cost of starting a Figure Entry rate and business density by region, 2003­05 Figure business, 2003­05 1 3 Percent Entry rate Business density Entry rate (percent) 20 10 15 8 10 6 5 4 0 0 20 40 60 2 Cost of starting a business (percentage of per capita income) 0 Africa and Asia Europe and Latin America Industrial All Note: Beta = ­0.087, = 0.00, 2 = 0.17, obs = 63. Middle East Central Asia and the countries countries Source: World Bank Group Entrepreneurship Database, 2007; World Bank Group 2005. Caribbean Source: World Bank Group Entrepreneurship Database, 2007. data on existing and new businesses disaggre- gated by sector of activity. While a large number greater entrepreneurship and such factors as of countries participated in this section, the higher GDP per capita and greater financial analysis includes only those using a similar sec- development. For example, entry rates have a toral classification, to allow comparison across significantly negative relationship with the cost regions. The final data set includes data from 46 of starting a business and a significantly positive countries for four sectors: wholesale and retail relationship with better governance (figures 3 trade; finance, insurance, and real estate; indus- and 4). These results are robust to the inclusion try; and services. of income level in a multivariate model.2 The distribution of businesses across these sectors shows an almost perfect asymmetry New data by sector between developing and industrial countries. In To gain a better understanding of local private developing countries the share of businesses in sector development, the 2007 survey collected the wholesale and retail trade and finance sec- Entry rate and quality of governance, Figure Entry rates around the world, 2003­05 Figure 2003­05 2 4 No data 0­5% 5­10% 10­15% >15% Entry rate (percent) 20 15 10 5 0 ­2 ­1 0 1 2 Governancea Note: Beta = 1.57, = 0.00, 2 = 0.23, obs = 81. a. Average of six aggregate governance measures: voice and accountability, government effectiveness, regulatory quality, political stability, rule of law, and control of corruption. Source: World Bank Group Entrepreneurship Database, 2007; Kaufmann, Kraay, and Source: World Bank Group Entrepreneurship Database, 2007. Mastruzzi 2006. tors is twice that in industrial countries, while tion of local registrars and the ability to register the share in industry and services is only about over the Internet--and electronic distribution of half as large (figure 5). registry information. The data show a deep dis- Understanding why entrepreneurs in devel- parity between industrial and developing coun- oping countries focus so disproportionately on tries (figure 6).3 While more than 80 percent of some sectors requires a deeper analysis. Still, a industrial countries have introduced an elec- preliminary analysis suggests that reasons for tronic registry, only about 30 percent of devel- focusing on the wholesale and retail trade sec- oping countries have done so. tor might include its lower requirements for In contrast, in most regions more than 60 per- 3 investment, human resources, knowledge, and cent of countries have introduced electronic distri- capital. In addition, firms in this sector might be bution (over the Internet) of registry information. more likely to join the formal economy--and The reason for this discrepancy may be that elec- therefore to be recorded by the survey-- tronic distribution is less expensive and difficult to because of a reluctance among overseas implement, since it requires neither electronic sig- importers and large domestic traders to pur- natures nor complex e-government platforms. chase from informal sector firms. Impact on the ease of starting a business Why automate business registration? Automation reduces the barriers to starting a To help better understand the challenges entre- business, as measured by the Doing Business preneurs face, the 2007 survey added a section indicators. In countries with electronic registra- relating to the registration of new businesses. tion, starting a business takes less time, requires Seventy-five countries participated in this sec- fewer procedures, and costs less (figure 7). This tion, providing valuable information about the might be explained by the greater efficiency of registration process and the extent to which it electronic registries. In addition, within regions, has been automated. countries with electronic registration have higher entry rates, though the difference is not Availability of electronic registration significant. To assess the modernization of business reg- Further support for the importance of istries, the survey collected information on the automating business registration comes from availability of electronic registration--which "before and after" data: in three countries that includes both the automation and computeriza- Figure Countries with electronic registration and distribution by region, 2006 Distribution of businesses by sector in 6 Figure industrial and developing countries, 2003­05 Percent Countries with e-registration Countries with e-distribution 5 Percent Industrial countries Developing countries 100 50 14/16 13/16 16/20 80 40 53/75 7/11 60 10/17 6/11 30 32/75 40 4/11 6/17 20 6/20 3/11 20 10 0 0 Industrial Europe and Latin America Africa and Asia Total Wholesale Finance, Industry Services countries Central Asia and the Middle East and retail insurance, and Caribbean trade real estate Note: The numbers above the bars are the countries with e-registration or e-distribution and the total countries in each region for which data are shown. Source: World Bank Group Entrepreneurship Database, 2007. Source: World Bank Group Entrepreneurship Database, 2007. E N T R E P R E N E U R S H I P N E W D A T A O N B U S I N E S S C R E A T I O N A N D H O W T O P R O M O T E I T Effect of electronic registration on the countries in the sectoral distribution of busi- Figure ease of starting a business, 2006 nesses, though why these differences arise is a 7 Countries with Countries without question for future studies. The survey also pro- e-registration e-registration 60 vides evidence that automating business regis- tration can greatly increase the ease of starting 50 viewpoint a business. The survey data could be used to measure the impact of similar policy reforms to 40 improve the investment climate. is an open forum to 30 encourage dissemination of public policy innovations for 20 private sector­led and Notes 10 market-based solutions for 1. The World Bank Group Entrepreneurship development. The views 0 Database is available at http://www.ifc.org/ifcext/sme published are those of the Average time Average number Average cost .nsf/Content/Entrepreneurship+Database. (days) of procedures (percentage of per authors and should not be capita income) 2. The analysis includes the log level of GDP per attributed to the World capita (see Klapper and others 2007). Bank or any other affiliated Source: World Bank Group Entrepreneurship Database, 2007; World Bank Group 2005. 3. The definition of electronic registration used here organizations. Nor do any of does not necessarily include online authentication or inte- the conclusions represent implemented electronic registration, the aver- gration of e-government services. official policy of the World age number of new firms registered in the fol- Bank or of its Executive lowing three years showed a remarkable References Directors or the countries increase compared with the three years before Kaufmann, Daniel, Aart Kraay, and Massimo they represent. implementation (figure 8). Mastruzzi. 2006. "Governance Matters V: Governance Indicators for 1996­2005." World Bank, World Bank To order additional copies Conclusion Institute, Washington, D.C. contact Suzanne Smith, With new topics and broader coverage of Klapper, Leora. 2006. "Entrepreneurship: How Much managing editor, developing countries, the 2007 World Bank Room F 4K-206, Does the Business Environment Matter?" Viewpoint series, Group Entrepreneurship Survey supports The World Bank, Note 313. World Bank Group, Financial and Private Sector 1818 H Street, NW, deeper and more comprehensive study of Development Vice Presidency, Washington, D.C. Washington, DC 20433. entrepreneurship. The survey reveals sharp dif- Klapper, Leora, Luc Laeven, and Raghuram Rajan. ferences between industrial and developing 2006. "Barriers to Entrepreneurship." Journal of Financial Telephone: Economics 82 (3): 591­629. 001 202 458 7281 Klapper, Leora, Raphael Amit, Mauro F. Guillén, and Average increase in annual registrations Fax: Juan Manuel Quesada. 2007. "Entrepreneurship and Firm Figure after implementing electronic registration 001 202 522 3480 8 Formation across Countries." Development Research Percent Email: Group Working Paper. World Bank, Washington, D.C. ssmith7@worldbank.org 100 World Bank Group. 2005. Doing Business in 2005: Removing Obstacles to Growth. Washington, D.C. Produced by Grammarians, 75 http://www.doingbusiness.org. Inc. 50 Printed on recycled paper 25 0 Jordan Singapore Guatemala Note: The figure compares annual registrations in the three-year period before and after implementation. Source: World Bank Group Entrepreneurship Database, 2007. T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l