IMPACT OF BUSINESS

ENTRY REFORMS

Evidences from Doing Business and beyond

Andrei Mikhnev

Corporate Registers Forum

Abu Dhabi, United Arab Emirates

March 9, 2015

Top Improving Economies as Measured by Doing Business

Ease of Doing Business

Reforms making it easier to do business

Starting abusiness

Dealing with construction

permits

Getting electricity

Registeringproperty

Getting credit

Protectingminority investors

Payingtaxes

Tradingacross

borders

Enforcingcontracts

Resolvinginsolvency

Tajikistan 166 √ √ √ √Benin 151 √ √ √ √Togo 149 √ √ √ √Côte d’Ivoire 147 √ √ √ √ √Senegal 161 √ √ √ √ √ √Trinidad and

Tobago

79 √ √ √

Congo,

Dem. Rep.

184 √ √ √ √ √

Azerbaijan 80 √ √ √Ireland 13 √ √ √United Arab

Emirates

22 √ √ √

1

CONVERGENCE ACROSS ECONOMIES

2

WHERE IS STARTING A BUSINESS EASY?

WHAT DO MANY OF THOSE ECONOMIES HAVE IN COMMON?

Global good practices

Putting procedures online

No or minimal minimum capital requirement

Creation of one-stop shops

Standardized forms

No courts involved

Fixed registration fee

No publication in legal journal required

New Zealand

Canada

Macedonia FYR

Armenia

Georgia

Singapore

Australia

Hong Kong SAR, China

Kyrgyz Republic

Portugal3

HIGHLIGHTS OF BUSINESS ENTRY REFORMS IN 2013-2014

4

COMPANY REGISTRIES IN HIGH-INCOME ECONOMIES OFFER

MORE ELECTRONIC SERVICES

5

ONLINE REGISTRATION MAKES STARTING A BUSINESS

FASTER AND CHEAPER

6

NEWLY REGISTERED FIRMS SURGED AFTER START-UP

REFORMS IN RWANDA

7

CHILE’S ONLINE REGISTRATION SYSTEM

8

UK’S ONLINE REGISTRATION SYSTEM IS ALMOST

UNIVERSAL

9

RESULTS OF BUSINESS ENTRY REFORMS OVER THE PAST 5

YEARS

• The number of economies with minimum capital requirement has been

cut.

• Globally, the average time to start a business has fallen by about 14 days.

• Over the past 5 years, there have been on average 45 reforms per year

on the area of Starting a Business .

• In 2013/2014, 45 economies made it easier to start a business, focusing

on simplifying companies registration.

• Among regions and over the past 5 years, Sub-Saharan Africa has

improved business start up processes the most, but still entrepreneurs

continue to face significant challenges.

1

0

11

Feature Economies

Simplified preregistration

and registration formalities

(publication, notarization,

inspection, other

requirements)

Albania; Bulgaria; The Gambia; Guatemala; India; Islamic

Republic of Iran; Jamaica; Malawi; Malta; Mauritius;

Nicaragua; Norway; Slovak Republic; Spain; Swaziland;

United Kingdom; Vietnam

Abolished or reduced

minimum capital

requirement

Austria; Benin; China; Côte d’Ivoire; Czech Republic;

Denmark; Italy; Moldova; São Tomé and Príncipe; Senegal;

Togo

Cut or simplified post-

registration procedures (tax

registration, social security

registration, licensing)

Greece; Iceland; Lithuania; Mauritania; Russian Federation;

United States

Created or improved one-

stop shop

Democratic Republic of Congo; France; Suriname;

Tajikistan; Timor-Leste

Introduced or improved

online procedures

Azerbaijan; FYR Macedonia; Malaysia; Switzerland;

Trinidad and Tobago

REFORMS IN 2013/2014

BEYOND DOING BUSINESS: SRI LANKA

0

0.210.17

0.48

0

0.1

0.2

0.3

0.4

0.5

0.6

Registered during intervention window

Treatment A Treatment B Treatment C Treatment D

Experiment details: Firms were randomly assigned to four treatment groups,

and received package A, B, C or D,Treatment A: Information on costs and benefits of registering, procedures of

registering with the Divisional Secretariat (DS) – the relevant registration for tax

purposes. Reimbursement for (modest) direct cost of registration if registered.

Treatment B: Treatment A + 10,000 Sri Lankan Rupees (LKR) or US$88

Treatment C: Treatment A + 20,000 LKR or US$175

Treatment D: Treatment A + 40,000 LKR or US$350.

FindingsRegistration: No effect (A), 17-21% (B,C), 48% (D)

InferencesLittle pent-up demand to become formal among existing firms.

Modest increases in the perceived benefits of being formal could increase the

demand to formalize.

12

BEYOND DOING BUSINESS: MEXICO

Reform details: Rapid Business Opening System (SARE) started in 2002.

Study detail: Identify two ‘species’ of informal business owners bases on personal

characteristics,

“Wage worker”: Informal business owners who have characteristics similar to wage workers, and

“Formal business owner”: Informal business owners similar to formal business owners.

Findings:

“Wage worker” species of business owners less likely to register due to the reform, but more likely

to become wage workers since the reform created jobs.

“Formal business owner” species more likely to register (in municipalities with high pre-reform

constraints)

Inferences:

Informal sector consists of different types of business owners. Some operate informally due to

stringent regulation, and simplifying regulation can entice them to register. Others may run

informal businesses while looking for a job and switch when more job opportunities arise (Could be

more than two varieties).

Business registration reform can allow individuals to better sort across occupations, thus

promoting reallocation of resources and potentially raising productivity.

13

BEYOND DOING BUSINESS: MAIN FINDINGS

• Low costs of compliance may prompt some firms to formalize, but are

not sufficient on their own. Only one of the factors that firms consider

when analyzing the costs and benefits of formalizing.

• High costs of business registration may be a barrier, but reforms to

lower these barriers may not be sufficient on their own.

• Reforms may need to be complemented: incentives to register or

stricter enforcement increase the perceived benefits of becoming formal,

and therefore provide an additional impetus to business registration.

• The specific constraints that prevent firms from becoming formal can

vary across firms, sectors, regions and countries.

• Reforms that do not have a sufficiently large scope (40% at least) may

altogether fail to affect constraints to formalization in some areas or

sectors.

14

ONGOING STUDIES

“Business Registration Impact Evaluation” (Malawi)

Brief description: Randomized experiment with (1 control) and three treatment groups,

A. Assistance for costless business registration

B. A+ assistance with costless tax registration; and

C. A+ information session at a bank that ended with the offer of business bank accounts.

Evidence of short-term effects (after 2 follow-up surveys, 2 more planned)

Large impact on business registration (75% all treatment groups)

No impact on tax registration.

Treatment A or B - no impacts on having a business bank account, financial practices, savings, and use of

complementary financial products.

Treatment C, significant impact on having a business bank account, financial practices, savings, and use

of complementary financial products.

75%

25% Registered

Did notregister

15

16

Graphic 1: formalization rates by gender of the business owner

Graphic 2: formalization rates inside and outside Dantokpa market

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 1127Administrative data from GUFE until September 30th 2014

FEMALE

Method 2:Formalization conditional on visit 1 received

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 722Administrative data from GUFE until September 30th 2014

MALE

Method 2:Formalization conditional on visit 1 received

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 1553Administrative data from GUFE until September 30th 2014

OUTSIDE TOKPA MARKET

Method 2:Formalization conditional on visit 1 received

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 296Administrative data from GUFE until September 30th 2014

TOKPA MARKET

Method 2:Formalization conditional on visit 1 received

“Impact Evaluation of ‘Entreprenant’ Status”(Benin)

Brief description: randomized experiment with (1 control) and three treatment groups,

A. Regulatory simplification, information on tax services,

B. A+ Business services training, support with bank services,

C. A+ B+ Tax preparation support and tax mediation services.

Preliminary results (implementation still in progress):

Formalization rates very similar in all groups, ranging from 10 to 12% of the total sample.

Rate is slightly higher for businesses who received all three packages, but remains to be seen if this is cost-effective.

Some differences in formalization rate by gender of entrepreneur.

Graphic 1: formalization rates by gender of the business owner

Graphic 2: formalization rates inside and outside Dantokpa market

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 1127Administrative data from GUFE until September 30th 2014

FEMALE

Method 2:Formalization conditional on visit 1 received

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 722Administrative data from GUFE until September 30th 2014

MALE

Method 2:Formalization conditional on visit 1 received

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 1553Administrative data from GUFE until September 30th 2014

OUTSIDE TOKPA MARKET

Method 2:Formalization conditional on visit 1 received

0.00

0.05

0.10

0.15

0.20

0.25

ControlGroup 1

Group 2Group 3

95% confidence interval

Number of observations: 296Administrative data from GUFE until September 30th 2014

TOKPA MARKET

Method 2:Formalization conditional on visit 1 received

ONGOING STUDIES

REFERENCES

• Bruhn, Miriam & McKenzie, David 2013. Using administrative data to evaluate municipal reforms: an evaluation of the

impact of Minas Fácil Expresso, Journal of Development Effectiveness, Taylor & Francis Journals, vol. 5(3), pages 319-

338. Paper , Impact (Policy) Note

• de Andrade, Gustavo Henrique & Bruhn, Miriam & McKenzie, David, 2013. A helping hand or the long arm of the law?

Experimental evidence on what governments can do to formalize firms, World Bank Economic Review, 2013. Paper,

Impact (Policy) Note

• Bruhn, Miriam; Loeprick, Jan 2014. Small business tax policy, informality, and tax evasion -- evidence from Georgia. World

Bank Policy Research Working Paper No. 7010, August. Paper

• de Mel, Suresh, David McKenzie, and Christopher Woodruff. 2013. The Demand for, and Consequences of, Formalization

among Informal Firms in Sri Lanka. American Economic Journal: Applied Economics, 5(2): 122-50. Paper

• McKenzie, David & Seynabou Sakho, Yaye, 2010. Does it pay firms to register for taxes? The impact of formality on firm

profitability, Journal of Development Economics, Elsevier, vol. 91(1), pages 15-24. Paper, Impact (Policy) note

• Bruhn, Miriam 2011. License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico, The

Review of Economics and Statistics, MIT Press, vol. 93(1), pages 382-386, February. Paper, Impact (Policy) Note.

• Bruhn, Miriam, 2013. A tale of two species: Revisiting the effect of registration reform on informal business owners in

Mexico, Journal of Development Economics, Elsevier, vol. 103(C), pages 275-283. Paper

• Pablo Fajnzylber, William F. Maloney, Gabriel V. Montes-Rojas, Does formality improve micro-firm performance? Evidence

from the Brazilian SIMPLES program, Journal of Development Economics, Volume 94, Issue 2, March 2011, Pages 262-

276, ISSN 0304-3878. Paper

• Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2011. Entry regulation and business start-ups: Evidence from

Mexico, Journal of Public Economics, Elsevier, vol. 95(11), pages 1501-1515. Paper

• Monteiro, Joana C.M. & Assunção, Juliano J., 2012. Coming out of the shadows? Estimating the impact of bureaucracy

simplification and tax cut on formality in Brazilian microenterprises, Journal of Development Economics, Elsevier, vol. 99(1),

pages 105-115. Paper

17

ANNEX

REFORM HIGHLIGHTS

18

Timor-Leste created a one-stop shop—making it possible to:

• reserve a company name,

• file the company statutes,

• apply for and obtain the final registration number and,

• publish the statutes all at one agency.

REFORMS HIGHLIGHTS: TIMOR-LESTE

This reform makes Timor-Leste the top improver in the Starting

a Business indicator:

• Timor-Leste gained 88 positions in the Starting a Business

ranking

• It is ranked 74 in the 2015 Starting a Business Indicator

19

REFORMS HIGHLIGHTS: SÃO TOMÉ AND PRÍNCIPE

This reform makes São Tomé and Príncipe one of the top

improvers in the Starting a Business indicator:

• São Tomé and Príncipe gained 71 positions in the Starting a

Business ranking

• It is ranked 30 in the 2015 Starting a Business Indicator

São Tomé and Príncipe made starting a business easier by

eliminating:

• the minimum capital requirement for business entities,

• the need to obtain a commercial license.

20

REFROMS HIGHLIGHTS: CHINA

In doing so, China also eliminated the need:

• to open a preliminary bank account,

• to deposit the capital,

• to obtain a certificate of deposit.

This reform makes China one of the top improvers in the

Starting a Business indicator:

• China gained 69 positions in the Starting a Business ranking

• It is ranked 98 in the 2015 Starting a Business Indicator

China made starting a business easier by eliminating:

• the minimum capital requirement,

• the requirement to obtain a capital verification report from

auditing a firm.

21

REFORMS HIGHLIGHTS: SPAIN

This reform makes Spain one of the top improver in the Starting

a Business indicator:

• Spain gained 39 positions in the Starting a Business ranking

• It is ranked 108 in the 2015 Starting a Business Indicator

Spain made Starting a Business easier by introducing an

electronic system linking several public agencies.

22

REFORM HIGHLIGHTS: WEST BANK

• A one year waiver to deposit the 25% of registered capital for newly

registering companies.

• There was a merger of a number of redundant procedures within the

company registration department, giving more authority for clearance to

mid-management.

• Removal of the Minister's clearance as a pre-requisite for the finalization of

the registration process.

• The removal of the requirement of an operating license from the

municipality, a fire department approval, and as inspection process a pre-

requisite for registering with the Chambers of Commerce (CoC).

• Removing the municipality approvals prior to registering with the CoC

eliminated 35 days and 12 procedures.

Location Number Days Required

to Comply with

Registration

Number of Procedures to

comply with Registration

Number of new

companies benefitting

from reforms

Before After Before After Before After

Ramallah 63 9 28 8 0 454

Nablus 60 9 29 9 0 15523