Doing business in visegrad group countries

Michal TVRDOŇ, Werner BERNATÍK

• introduction

Small and medium-size enterprises (SMEs) are key drivers of competition, growth and job creation, both in advanced and developing countries. The term SMEs covers a wide range of definitions and measures, varying from country to country and varying between the sources reporting SMEs statistics. Some of the commonly used criteria are the number of employees, total net assets, sales and investment level. However, the most common basis for definition is employment, and here again, there is variation in defining the upper and lower size limit of an SME. Despite this variance, a large number of sources define an SME to have a cut-off range of 0-250 employees.

The aim of this article is to compare main indicators of business environment in Visegrad group countries. We use data from Doing Business research which is held by World Bank group. Individual indicators are also the subchapters of this paper. We use selected Doing Business indicators which have been obtained from web page of this project.

• Doing business project

The first Doing Business report, Publisher in 2003, covered 5 indicator sets in 133 economies. This year's report (2009) covers 10 indicator sets in 181 economies.

Doing Business provides a quantitative measure of regulations for starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business - as they apply to domestic small and medium-size enterprises. But the indicator does not account for all factors important for doing business - for example, macroeconomic conditions, infrastructure, workforce skills or security and also does not cover all regulations, or all regulatory goals, in any economy. As economies and technology advance, more areas of economic activity are being regulated.

The Doing Business methodology has five limitations that should be considered when interpreting the data. First, the collected data refer to businesses in the economy's largest business city and may not be representative of regulation in other parts of the economy. Second, the data often focus on a specific business form -- generally a limited liability company (or its legal equivalent) of a specified size -- and may not be representative of the regulation on other businesses, for example, sole proprietorships. Third, transactions described in a standardized case scenario refer to a specific set of issues and may not represent the full set of issues a business encounters. Fourth, the measures of time involve an element of judgment by the expert respondents. Finally, the methodology assumes that a business has full information on what is required and does not waste time when completing procedures. In practice, completing a procedure may take longer if the business lacks information or is unable to follow up promptly.

1. Starting a Business

Simpler and faster business entry makes it easier for workers and capital to move across sectors when economies experience economic shocks. This topic identifies the bureaucratic and legal hurdles an entrepreneur must overcome to incorporate and register a new firm.  It examines the procedures, time, and cost involved in launching a commercial or industrial firm with up to 50 employees and start-up capital of 10 times the economy's per-capita gross national income (GNI).

The figure below shows the main indicators. They include:

• all procedures required to register a firm (as the number of procedures),

• average time spent during each procedure (as number of days),

• official cost of each procedure (as a percentage of income per capita)

• the minimum capital required (as a percentage of income per capita).

A list of common procedures required to start up a company is provided by Djankov et al. (2002) and they are listed in Table 1. The procedures are further divided by thein function: screening, health and safety, labour, taxes, and environment.

Tab. 1: List of Procedures for Starting up a Company

Source: Djankov et al. (2002, pp.11)

We compare Visegrad group countries in this paper and Figure 1 shows this indicator for these countries. The easiest way how to start up a company is in Hungary among Visegrad group countries. Hence the longest way to start up a company exists in Poland (the highest number of procedures, duration and cost expressed as percentage of income per capita) and values of these indicators are high in this country even in world countries comparison (world ranking 145 compare with 27 for Hungary, 48 for Slovakia and 86 for Czech Republic).

Figure 1: Indicators of Starting a Business in V-4 countries

Source: World Bank: Doing Business 2009

1. Employing Workers

Employment regulations are needed to allow efficient contracting between employers and workers and to protect workers from discriminatory or unfair treatment by employers. In its indicators on employing workers, Doing Business measures flexibility in the regulation of hiring, working hours and dismissal in a manner consistent with the conventions of the International Labour Organization (ILO). An economy can have the most flexible labor regulations as measured by Doing Business while ratifying and complying with all conventions directly relevant to the factors measured by Doing Business4 and with the ILO core labor standards. No economy can achieve a better score by failing to comply with these conventions.

Doing Business measures the regulation of employment. It specifically examines the difficulty of hiring, nonstandard work schedules and paid annual leave, and the costs and rules governing redundancy termination. This measurement is based on work of Botero et al. (2004). Employment laws regulate the individual employment relation, including the alternatives to the standard employment contract, the flexibility of working conditions, and the termination of employment. To capture all of these aspects, Botero et al. (2004) calculates four sub-indexes: (i) alternative employment contracts; (ii) cost of increasing hours worked; (iii) cost of firing workers; and (iv) dismissal procedures. This index of employment laws, more so than other indices, reflects the incremental cost to the employer of deviating from a hypothetical rigid contract, in which the conditions of a job are specified and a worker cannot be fired. This index is thus an economic measure of protection of (employed) workers, and not just a reflection of legal formalism.

The construction of indexes consists of:

• Difficulty of hiring index: applicability and maximum duration of fixed-term contracts and minimum wage for trainee or first-time employee.

• Rigidity of hours index: scheduling of nonstandard work hours and annual paid leave.

• Difficulty of firing index: notification and approval requirements for termination of a redundant worker or a group of redundant workers, obligation to reassign or retrain and priority rules for redundancy and reemployment.

• Rigidity of employment index: a simple average of the above three indices.

• Firing cost: notice requirements, severance payments and penalties due when terminating a redundant worker, expressed in weeks of salary.

Higher values in the table indicate more rigid regulations. Figure 2 illustrates situation in Visegrad group countries. Similar values were reached in Hungary, Poland and Slovakia. Czech Republic was the economy with the least rigid labor regulation (world ranking was 59 compared with 82 for Poland, 83 for Slovakia and 84 for Hungary). Czech Republic provided for greater flexibility in using employment contracts - e.g. introduction flexibility in overtime hours, probationary periods and length of the workweek. In addition, its amended labor code simplified the working hours account, allowing choice in the distribution of working hours over a 4-week period.

Figure 2: Employing Workers Indexes

Source: World Bank: Doing Business

1. Registering Property

Formal property titles help promote the transfer of land, encourage investment and give entrepreneurs access to formal credit markets. So this topic examines the steps, time, and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and a building that is already registered and free of title dispute.

The figure below shows the main indicators, which include:

• number of procedures legally required to register property,

• time spent in completing the procedures, and

• the costs, such as fees, transfer taxes, stamp duties, and any other payment to the property registry, notaries, public agencies or lawyers. The cost is expressed as a percentage of the property value, assuming a property value of 50 times income per capita.

Generally, economies that score well on the ease of registering property tend to have simple procedures, low transfer taxes, fixed registration fees, online registries and time limits for administrative procedures. They also make the use of notaries and lawyers optional.

Figure 3: Registering Property

Source: World Bank: Doing Business

As is seen in Figure 3 the property registration is the easiest in Slovakia (world ranking 7), where are required only three procedures and 17 days for registration). Similar situation is in Hungary (world ranking 57), Czech Republic (world ranking 65) and Poland (world ranking 84) with longer duration and costs of property registration.

1. Paying Taxes

This topic addresses the taxes and mandatory contributions that a medium-size company must pay or withhold in a given year, as well as measures of administrative burden in paying taxes.

The figure below shows the main indicators. They include:

• total number of tax payments per year

• time it takes to prepare, file and pay (or withhold) the corporate income tax, the value added tax and social security contributions (in hours per year)

• amount of taxes on profits paid by the business as a percentage of commercial profits

• amount of taxes and mandatory contributions on labor paid by the business as a percentage of commercial profits. This amount include mandatory social security contributions paid by the employer both to public and private entities, as well as other taxes or contributions related to employing workers.

• amount of taxes and mandatory contributions paid by the business that are not already included in the previous 2 categories

Figure 4: Paying Taxes

Source: World Bank: Doing Business

Where taxes are high and commensurate gains seem low, many businesses simply choose to stay informal. According to Djankov et al. (2009) the impact of corporate taxes is not just that on informality, however. Corporate taxes have a large adverse effect on FDI, virtually all of which is formal. A recent study finds that higher tax rates are associated with less private investment, fewer formal businesses per capita and lower rates of business entry. Economies that rank high on the ease of paying taxes tend to have lower and less complex business taxes.

The competitiveness of Visegrad group countries is low in this set of indicators. Their world ranking worse compared with previous indicators (111 for Hungary, 118 for Czech Republic, 126 for Slovakia and 142 for Poland). The concrete values differ among the countries (see figure).

1. Protecting Investors

This topic measures the strength of minority shareholder protections against misuse of corporate assets by directors for their personal gain. Djankov et al. (2008) has constructed a new index of shareholder protection for 72 countries. The index specifically addresses the protection of minority shareholders against self-dealing transactions benefiting controlling shareholders

The figure below shows the main indicators. They include:

• transparency of transactions (Extent of Disclosure Index - The index ranges from 0 to 10, with higher values indicating greater disclosure);

• liability for self-dealing (Extent of Director Liability Index - The index ranges from 0 to 10, with higher values indicating greater liability of directors);

• shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suit Index - the index ranges from 0 to 10, with higher values indicating greater powers of shareholders to challenge the transaction);

• strength of Investor Protection Index (the average of the three index - the index ranges from 0 to 10, with higher values indicating more investor protection).

Figuere 5: Protecting Investors

Source: World Bank: Doing Business

Without investor protections, equity markets fail to develop and banks become the only source of finance. The result: businesses fail to reach efficient size for lack of financing, and economic growth is held back.

Economies that rank high on the strength of investor protection index have extensive disclosure requirements and give shareholders broad access to information both before and during trials to determine director liability.

The highest protection of investor was found in Poland (world ranking 38). The other Visegrad group countries reached significantly higher values (88 for Czech Republic, 104 for Slovakia and 113 for Hungary).

• Conclusion

Countries of Visegrad group countries have become new member states of European Union in 2004. The mandatory condition of acession into EU was fulfilling the Copenhaven criteria which consist of political and economic sections. The most important economic condition was to transform economy from central planned to market based one. This step also meant the creation of proper business environment because this is necessary factor for development of entrepreneurship and economy as a whole. Now after the transition has to be done we can compare these economies with others in EU and we can argue, that business environment setting is similar in these countries compared with ones in advanced economies.

Doing Business project provides broad set of indicators. We use some of these indicators for comparison of business environment in Visegrad group countries. Generally this group of countries has higher level of overall indicator of ease of doing business but in this year they are part of reformer group compared with previous years. In addition significant differences still exist in values of some indicators. The overall rank shows that the best business environment exists in Slovakia, followed by Hungary, Czech Republic and Poland. The worst ranking of this group was reached in dimension of Paying taxes. In addition there is still some room for simplifying procedures to register property encourages investment and gives entrepreneurs better access to credit to grow businesses and create jobs.

REFERENCES

1. BOTERO, J.C., S. DJANKOV, R. LA PORTA, F.L. DE SILANES, A. SCHLEIFER. 2004. „The Regulation of Labor“. [online][cit. 30.4.2009] Available from <http://www.doingbusiness.org/documents/labor_June04.pdf>.

2. DJANKOV, S., R. LA PORTA, F.L. DE SILANES, A. SCHLEIFER. 2002. „The Regulation of Entry”. The Quarterly Journal of Economics. CXVII (1): 1-37.

3. DJANKOV, S., R. LA PORTA, F.L. DE SILANES, A. SCHLEIFER. 2008. „The Law and Economics of Self-dealing“. Journal of Financial Economics. 88(3): 430-465.

4. DJANKOV, S., T. GANSER, C.MCLIESH, R. RAMALHO, A. SCHLEIFER. 2009. The effects of corporate taxes on investment and entrepreunship. [online][cit. 20.4.2009] Available from <http://www.doingbusiness.org/documents/AEJ-Manuscript.pdf>.

5. World Bank. 2009. Doing Business 2009. [online][cit. 18.4.2009] Available from<http://doingbusiness.org>.

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Title of the paper, size 10 / Názov príspevku, veľ. písma 10

“Strengthening the educational and scientific collaboration among Faculties of Economics within V4 and countries of South Eastern Europe”

Visegrad Strategic Program No. 30810004-IVF

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1. Screening procedures

- Certify business competence

- Certify a clean criminal record

- Certify marital status

- Check the name for uniqueness

- Notarize company deeds

- Notarize registration certi.cate

- File with the Statistical Bureau

- File with the Ministry of Industry and Trade, Ministry of the Economy, or the

respective ministries by line of business

- Notify municipality of start-up date

- Obtain certi.cate of compliance with the company law

- Obtain business license (operations permit)

- Obtain permit to play music to the public (irrespective of line of business)

- Open a bank account and deposit start-up capital

- Perform an of.cial audit at start-up

- Publish notice of company foundation

- Register at the Companies Registry

- Sign up for membership in the Chamber of Commerce or Industry or the Regional

Trade Association

2. Tax-related requirements

- Arrange automatic withdrawal of the employees' income tax from the company payroll

funds

- Designate a bondsman for tax purposes

- File with the Ministry of Finance

- Issue notice of start of activity to the Tax Authorities

- Register for corporate income tax

- Register for VAT

- Register for state taxes

- Register the company bylaws with the Tax Authorities

- Seal, validate, rubricate accounting books

3. Labor/social security-related requirements

- File with the Ministry of Labor

- Issue employment declarations for all employees

- Notarize the labor contract

- Pass inspections by social security of.cials

- Register for accident and labor risk insurance

- Register for health and medical insurance

- Register with pension funds

- Register for Social Security

- Register for unemployment insurance

- Register with the housing fund

4. Safety and health requirements

- Notify the health and safety authorities and obtain authorization to operate from the

Health Ministry

- Pass inspections and obtain certi.cates related to work safety, building, .re,

sanitation, and hygiene

5. Environment-related requirements

- Issue environmental declaration

- Obtain environment certi.cate

- Obtain sewer approval

- Obtain zoning approval

- Pass inspections from environmental of.cials

- Register with the water management and water discharge authorities

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