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By Martin Soderberg, Managing Partner, SPEAR Capital

Picture133 - Finance Digest │ Financial Literacy │ Financial Planning

Many people place great stock in the World Bank’s Ease of Doing Business Index. The list outlines the levels of business regulation in 190 economies. Long used as a way for countries to attract investors and a guide for investors to decide where to invest, the Index purportedly assessed the business climate on 12 broad parameters integral to starting, sustaining and winding down a business. The 2020 report was the 17th in the series of annual studies. It was also the last.

The global financial institution decided to scrap the Index earlier this month after an internal audit found “undue pressure” by top bank officials to manipulate data had resulted in country rankings changed to favour China. Investigators found that attempts had also been made to find ways to manipulate Saudi Arabia’s ranking. And, as Bloomberg points out, the Index didn’t actually study conditions on the ground, meaning that countries only had to make changes on paper to rise up the list.

The Index’s demise should act as a timely reminder that investors are better off focusing on the fundamentals of a specific business, rather than perceptions of the country it operates in.

The trouble with perception

The trouble with things like the Ease of Doing Business Index is that it can drive the perceptions of investors and, by extension, the fortune of countries. But real change is difficult. There was always, therefore, going to be an incentive for countries to improve their ranking at whatever cost.

Small wonder, then, that there was often a big difference between a country’s position on the Index and the reality of doing business on the ground there. Speaking from personal experience, there have been times when doing business in a country such as Zimbabwe (which at times has been ranked in the 170s on the Index) has been easier than in the UK (ranked 8th in 2020). Even if a country has all the laws and regulations in place needed to rise to the top of an Index, that doesn’t mean that it’ll have the infrastructure and general conditions needed to make doing business easy.

It’s also worth noting that while the Index did provide some context behind the rankings, a lot more stock was placed in the overall ranking than the sub-scores. Even if there was a lot more difference between positions 60-70 than in the top 50, there’s no doubt that a country would much rather be in position 23 than 48.

Good company, bad country

As such, there’s a good argument to be made that investors should care less about the country a company operates in than its overall fundamentals. In fact, if a company is thriving despite operating in a country perceived to be bad for business, then it might actually be a more worthwhile investment than a middling company in a thriving economy.

In the current global economic reality, that might be more true than ever. Emerging market countries have been hit particularly hard by COVID-19’s economic ructions. Post-pandemic, entities in these markets will be more receptive than ever to investors.

While there are undoubtedly risks in emerging markets, they are well known and understood. Investors can therefore mitigate for them. And once trade returns to anything resembling normal in these markets, investors can expect to see outsized returns.

Countries still need to make an effort

That said, even without the Index, countries shouldn’t give up on trying to make doing business easier. In countries where it’s easy to do business, more people start businesses, creating more targets for investors.

Ultimately, the best way to attract investors isn’t by trying to climb rankings on an index, but to ensure that all the conditions are in place to help businesses succeed. That includes infrastructure, regulation, education, governance, and any one of a number of factors that make it easy for people on the ground to do business and for investors to find, and invest in, those businesses.

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