Can a Better Business Environment Create More Wealth?

Can a Better Business Environment Create More Wealth?

G. Monray on the link between regulation, entrepreneurship and economic development

Introduction

For decades, governments have tried to make their economies more attractive to entrepreneurs and investors. But an important question remains: does making it easier to do business actually contribute to wealth creation and poverty reduction?

In his 2018 book chapter Ease of Doing Business and Wealth Creation, G. Monray examined this question from a conceptual and comparative perspective. The chapter was published in Examining the Private Sector’s Role in Wealth Creation and Poverty Reduction, edited by Scott Hipsher, and formed part of IGI Global’s Advances in Public Policy and Administration series.

Rather than presenting a new econometric model, the chapter reviewed the World Bank's Doing Business framework and its regulatory indicators, examining how the institutional environment surrounding firms can influence entrepreneurship, investment and, ultimately, economic development. At the time, the Doing Business project covered multiple dimensions of the regulatory environment affecting firms, particularly SMEs.

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Q: What was the central question behind the chapter?

G. Monray: The central question was relatively simple: can the way governments regulate business help create wealth and reduce poverty? I approached the question by looking beyond the company itself. Entrepreneurs may have capital, ideas and managerial capabilities, but they operate within an institutional environment created by governments.

If starting a company, obtaining permits, registering property, accessing credit, paying taxes or dealing with contracts becomes unnecessarily complicated or expensive, those regulatory costs can affect entrepreneurial activity.

The chapter therefore examined the Ease of Doing Business (EDB) framework as a way of understanding the relationship between government regulation and the private sector.

Q: Why did you focus on the World Bank's Doing Business project?

G. Monray: I considered the Doing Business project particularly relevant because it attempted to transform an abstract concept"business friendliness"into measurable indicators. The project collected quantitative information on regulations faced by businesses across economies and over time. The framework had originally been launched in 2003 with five sets of indicators covering 133 economies and had subsequently expanded substantially. This was important because it allowed researchers to move from statements such as "this country is easy to do business in" toward more structured comparisons of the regulatory conditions faced by firms.

Q: What dimensions of the business environment were particularly important?

G. Monray. I discussed the principal dimensions used by the Doing Business framework, including areas such as starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders and enforcing contracts. The important point was not that one indicator could explain wealth creation by itself. Rather, I viewed these variables as components of a broader institutional ecosystem. A company does not operate in isolation. Its costs and opportunities are influenced by the rules governing the environment in which it operates.

Q: Does easier regulation automatically produce greater wealth?

G. Monray. No. The argument should not be interpreted as saying that deregulation automatically produces economic prosperity. The relationship is more nuanced. A functioning economy needs institutions, contracts, property rights and effective public administration. The objective is not simply to have less regulation, but to have regulation that is efficient, predictable and compatible with productive economic activity. That distinction is particularly important for SMEs. A large multinational may be able to absorb complex administrative procedures through specialist legal, financial and compliance departments. A small entrepreneur may not have those resources. Therefore, administrative complexity can have a proportionally larger effect on smaller businesses.

Q: Why are SMEs so important in this discussion?

G. Monray. I emphasized the relevance of SMEs because they are often the entry point for entrepreneurship and employment creation. If regulatory barriers discourage people from establishing businesses, expanding them or entering formal markets, the economy may lose potential entrepreneurial activity. Conversely, a regulatory environment that reduces unnecessary transaction costs can make it easier for entrepreneurs to transform ideas into companies. The broader argument is therefore: better institutional conditions → lower barriers to entrepreneurship → greater private-sector activity → potential wealth and employment creation.

The word potential is important. The chapter presented this as a conceptual relationship rather than claiming that regulatory reform alone determines economic outcomes.

Q: Did geography matter in your analysis?

G. Monray. Yes. The text examined Doing Business information across geographical regions because countries do not operate under identical institutional, cultural or economic conditions. The same regulatory reform can have different consequences depending on the country's level of development, infrastructure, financial system, institutional capacity and entrepreneurial culture.

This regional perspective was therefore useful for avoiding the assumption that a single regulatory formula would produce identical results everywhere.

Q: What was the most important lesson for governments?

G. Monray. The central message was that governments should view regulation not simply as an administrative matter but as part of the economic infrastructure of the country. Roads, ports and telecommunications are visible forms of infrastructure. Regulations are less visible, but they can also impose costs on economic activity. If a business spends excessive time and resources complying with unnecessary procedures, those resources cannot simultaneously be invested in employees, technology, marketing or expansion. The quality of the institutional environment can therefore become part of a country's competitiveness.

Q: How does this connect with your other research on corruption and doing business?

G. Monray: There is a clear intellectual connection. In earlier research with D. A. Filipescu, G. Monray examined the relationship between perceived corruption and ease of doing business across 172 nations. That study found a significant correlation between the two variables. The important methodological qualification was that correlation does not establish causation.

The 2018 chapter approached the issue from another direction. Instead of concentrating on corruption, G. Monray examined the broader regulatory environment and asked how institutional conditions can affect the private sector's ability to create economic value.