What Really Makes a Country Easy to Do Business In?

What Really Makes a Country Easy to Do Business In?

G. Monray on income, geography, institutions and the hidden patterns behind national competitiveness

Introduction

When companies evaluate a country for investment, expansion or internationalisation, they rarely look at a single variable.

They consider income levels, geography, institutions, corruption, economic freedom, infrastructure and many other characteristics. But an important analytical question follows: which of these factors are actually associated with differences in the ease of doing business?

That was the central question behind Jorge Mongay Hurtado's 2018 study, Country Patterns and Effects on the Ease of Doing Business and Competitiveness: A Global Study, published in the International Journal of Competitiveness by Inderscience.

The research examined 166 countries during the period 2010–2015, generating 2,324 country-year observations. It investigated the relationship between the World Bank's Ease of Doing Business indicators and 13 country-level factors, using analysis of variance (ANOVA) and effect-size analysis.

The results were revealing. Four factors: income, geographical region, economic freedom and corruption, showed statistically significant relationships with Ease of Doing Business, while nine did not. The study also found particularly substantial estimated effects for income and geographical region.

Q: What was the fundamental question behind the research?

G. Monray: The starting point was a relatively simple question: why do countries differ in their ease of doing business? We already had international indicators that allowed countries to be compared. But a ranking tells us where a country stands; it does not necessarily tell us what characteristics are associated with that position. I wanted to move one step further and examine whether particular economic, institutional and geographical characteristics could help explain the differences observed between countries. For an international manager, that distinction is important. If you are considering entering a market, knowing that one country ranks differently from another is useful. Understanding the characteristics associated with that difference is potentially much more useful.

Q: Why was a global study necessary?

G. Monray: Because international business decisions are inherently comparative. A company considering Spain, Thailand, Germany or Brazil is not evaluating each country in isolation. It is comparing alternative environments for investment and operations. The study therefore used a broad international sample of 166 countries and several years of observations. This provided a much wider basis for identifying patterns than a study limited to one region or one year. It also allowed us to consider whether observed differences were persistent across a period rather than simply the result of an unusual year.

Q: What exactly did you mean by "country patterns"?

G. Monray: A country pattern is essentially a recurring relationship between characteristics of countries and their business environment. For example, if countries with particular income levels systematically display different Ease of Doing Business characteristics, that is a pattern worth investigating. The same applies to geographical region, economic freedom or corruption.

The objective was not to claim that one variable mechanically determines the business environment. It was to identify systematic associations that could help us understand international differences.

Q: What did the study examine?

G. Monray: We examined 13 country-level factors and compared them with Ease of Doing Business indicators. The methodology was deliberately broader than simply comparing countries according to their ranking. We wanted to determine which factors were statistically associated with differences in the business environment and then examine the magnitude of those relationships. That second element is important because statistical significance and practical importance are not necessarily the same thing.

Q: What did you discover?

G. Monray: One of the interesting findings was that the results were much more selective than one might initially expect. Only four of the 13 factors showed statistically significant relationships with Ease of Doing Business: income, geographical region, economic freedom and corruption. The other nine factors did not reach statistical significance at the conventional 5% level. That was important because it demonstrated that not every variable that appears intuitively relevant necessarily has the same empirical relationship with the business environment.

Q: Why was effect-size analysis particularly important?

G. Monray: Because significance alone can be misleading. Suppose two variables are statistically significant. That does not mean that they are equally important in practical terms. The effect-size analysis allowed us to ask a second question: how substantial is the relationship?

In the study, income had an estimated effect capable of explaining up to 53% of the variation in Ease of Doing Business, while geographical region reached an estimated effect of up to 46%. These figures should be understood as results from the study's statistical framework. They should not be interpreted as saying that income or geography mechanically causes 53% or 46% of business-environment performance.

Q: Why was income such an important variable?

G. Monray: Income is connected with many characteristics of economic development. Higher-income countries may have different institutional capabilities, infrastructure, financial systems and administrative resources from lower-income countries. But the research does not establish a simple causal relationship in which higher income automatically produces a better business environment.

The finding is that income was strongly associated with differences in Ease of Doing Business within the countries and period examined. That distinction between association and causality is fundamental in international comparative research.

Q: The geographical-region finding is perhaps more surprising. How do you interpret it?

G. Monray: Geography can represent much more than physical location. Countries within the same region can share historical experiences, institutional traditions, legal systems, economic structures, cultural characteristics and regional integration arrangements. Therefore, geographical region can capture a combination of characteristics that are difficult to isolate individually.

The finding does not mean that geographical location itself causes a country to be easier or harder in which to do business. Rather, it indicates that regional patterns were strongly associated with differences in the business environment.

For international managers, that is an important consideration because a country's regional context can provide information that a country-level ranking alone does not reveal.

Q: What did you find regarding economic freedom?

G. Monray: Economic freedom was one of the four factors with a statistically significant relationship with Ease of Doing Business. Conceptually, this makes sense because businesses operate within an institutional framework that determines how freely economic activity can take place.

However, I would again emphasize the methodological limitation. The study identifies an association; it does not demonstrate that increasing economic freedom by itself will automatically produce a corresponding improvement in every dimension of the business environment.

The relationship needs to be interpreted within the wider institutional and economic context.