Import-Export Due Diligence: Measuring Business Regulations—Part 1

This is the fourth article in my series of articles for exporters and importers about how to assess the risk of doing business with both the relevant country and the particular customer or supplier.

It is important to assess the risks associated with both countries and customers because a rogue customer in a good (from a risk perspective) country is not a much better risk than a good customer in a rogue (from a risk perspective) country.

In this article I will look at the data made available by the World Bank through its project, Doing Business: Measuring Business Regulations.

Foreign Government Regulation of Business

The World Bank's Doing Business project provides a set of data on virtually all the nations of the world that measure business regulation and, if you like, the ease of doing business in a globally interconnected and interdependent world that paradoxically is not well inter-regulated. (Note: These Doing Business results will be replaced in 2024 with Business Ready (B-READY), an updated version of Doing Business that will measure similar parameters.)

I think we have all heard the words: "The job is not complete until all the paperwork has been done."

Bureaucracy, or as I like to refer to it sometimes, bureaucrazy, is one of the banes of business processes. The less paperwork the better. I can almost hear the chorus of supporting voices from the corporate world who would probably wish for nothing better than no controls. Yet controls are needed at all levels and in many different ways to maintain a reasonably fair trading environment for all.

A lack of regulation is a contributing factor in global financial crises; unfair denial of market access; unwarranted duties on products; the spread of disease, drugs and weapons; and many other global issues. Sometimes we resolve these issues by international agreements, other times there are no such instruments to keep everyone honest. I will explore some of these issues in more detail in later articles.

In this article, I will limit the discussion to the macro-level assessment of a country's regulatory regime by concentrating on some aspects of the Doing Business project data. Remember that these data are freely available on the internet. It is a searchable database with options to download these data to a spreadsheet. I will provide links as relevant.

Doing Business provides economy rankings of countries based on 10 categories. The following comments relate to the 2019 set of data.

'Doing Business' Categories

I have listed the first five categories below with some brief comments. I will discuss the last five categories in my next article in the series.

Starting a Business

This category may be useful if you are thinking of opening an office in a foreign country either as a selling or a buying office. Risks in doing this include staffing and associated labor laws such as who may be employed, on what basis, etc. There are typically government restrictions on employing expatriate labor and a quagmire of foreign regulations to contend with. Expert advice is required before embarking on this venture.

Dealing with Construction Permits

This category may be useful where bricks and mortar investment is required. The easiest example that I can think of is someone setting up a physical facility such as a factory or a testing laboratory. Because of its nature, this category may have less general relevance as it typically requires a large financial undertaking, and there are all sorts of risks in setting up a physical facility in a foreign country such as labor issues and the ability to own the land, which may require entering into a joint venture with a local partner. Strategic partnerships and the associated considerations are, however, beyond the scope of this series or articles, so I will not offer further comments here.

Getting Electricity

This category is linked to some of the comments above and is only applicable to situations where physical presence is required.

Registering Property

Again, this category only applies to situations where a physical presence is required in a foreign nation. The database provides an average processing time for registering property. It is a useful starting point for considering at the very outset whether this is worthwhile for an organization or an individual or not.

For example, in New Zealand, which the report ranks as the number one economy overall, there are only two procedures involved in registering property, it only takes one day, and that process costs 0.1% of the property value.

On the other hand, Singapore, which is the second-ranked economy overall, requires six procedures to register property in that country. Those six procedures take an average of 4.5 days and cost about 2.9% of the value of the property.

Getting Credit

For this series of articles, this category is more interesting and applicable than some of the other categories available. By drilling down to the next level of data we can find a depth of credit information index. This is important because this index tells what sort of data is kept on firms and individuals:

• Are data kept on the public credit registry or by private credit bureaus?
• Is both positive and negative data available?
• Is credit information distributed by the registry on retailers, trade creditors and financial institutions?
• Are more than two years of historical credit information available?
• Does the law guarantee that borrowers can inspect the data in the largest credit registry?

As you can see these issues go to the heart of credit information transparency. For any would-be traders in a particular country, this is useful information as it informs us as to how easy it is to get information about our trading partners in a foreign country.

In some countries, there is virtually no credit information available. I chose three economies at random for the  discussion here: Sierra Leone (ranked 163), Estonia (ranked 16) and New Zealand (ranked 1).

Sierra Leone has an index of 0—no credit information is available at all. Estonia has an index of 7; New Zealand's index is 8. (However, you need to be careful in assuming that there is a linear association between the overall ranking and each data subset. Variations are great.)

The other subset of data that is highly relevant is the strength of legal rights particularly in relation to secured creditors' rights. A seller should be interested to know beforehand what rights they may have in a case where their foreign partner becomes insolvent and owes them money. This may influence the security of the method of payment used.

A comparison of legal rights sees the legal index for New Zealand at 12, Sierra Leone at 5, and Estonia at 7. Intuitively this tells me that if I am doing business in Sierra Leone, I am more likely to be concerned about getting paid because my chances of recovering debt are comparatively less than in the other two countries.

Hopefully, with these examples, the reader can see how we slowly start to build a picture bit by bit about a trading situation as we get data from different sources. I like to refer to this as the trading risk canvas. Just as a painter starts with the background and slowly adds different colors and paint strokes to achieve the final result, we are building a picture of potential risk.

I will discuss the next five data categories of Doing Business in my next article.

This article was first published in August 2013 and has been updated to include current information, links and formatting.