This article provides some of the foundational concepts on business environment reform and its role in private sector development. It answers the questions: What is the business environment? What is business environment reform?
Much of the content is based on the Donor Committee for Enterprise Development (DCED) key documents in this field, of which I was a key contributor. The DCED approach represents the view of most donor and development agency members. There are variations in agency approaches, but the DCED Guidelines remain an important reference in this work.
What is the business environment?
The 2008 DCED Donor Guidelines, entitled Supporting Business Environment Reforms; Practical Guidance for Development Agencies define the business environment as:
“a complex of policy, legal, institutional, and regulatory conditions that govern business activities.”
The business environment is a sub-set of the investment climate. See Figure 1 below.
This definition encompasses the administration and enforcement mechanisms established by governments to implement policy. It also includes the institutional arrangements that determine the way key actors operate (e.g., government agencies, regulatory authorities, and business membership organisations including businesswomen associations, civil society organisations, trade unions, etc.).
Figure 1: Relationship between the investment climate and business environment
SOURCE: DCED 2008
There are four levels of the business environment. These are applied in the analysis of the business environment and the formulation of reform interventions.
- Regional business environments. This refers to business environments that span more than one country and seek to improve the conditions for business growth and trade in a region. Examples include the European Union, African Union, and the Association of Southeast Asian Nations.
- National business environments. This is the most common level for conceptualising the business environment. It is based on national boundaries.
- Subnational business environments. Subnational or local business environments are increasingly recognised for the role they play in influencing private investment decisions. Subnational business environments can be defined by state government boundaries, provincial authorities for even local government authorities.
- Sector business environments. There can be significant variations in business environments based on sectors. For example, the business environment for agriculture may contain quite different barriers than the business environment for construction or tourism. Indeed, sub-sector and market-based business environments contain variations, and analysis at this level is often essential. These are often used to complement market systems development programmes.
Business environments influence the decisions of business owners and managers in diverse ways.
“A conducive business environment is one in which private businesses and investors are more likely to invest, start and grow a business.”
The influence of the business environment on business decisions can vary based on many factors. Including the location of the business, gender of the business owner, size of business, business sector, etc. A poor business environment can disproportionately affect small businesses.
What is business environment reform?
As the name suggests, business environment reform is about modifying the business environment. This is done to positively influence a change in the behaviour of private enterprises in ways that lead to increased levels of investment and innovation and the creation of more and better jobs.
There are three objectives:
- Reducing business costs: to increase profits (that may lead to increased investment) or increasing market share (and thereby output and employment);
- Reducing risks: poor or frequently changing government policies, laws and regulations pose a risk for business, thus, reducing the cost of capital (and thereby increasing the number of attractive investments in the market); and
- Increasing competitive pressures through new entry: to stimulate the efficiency and innovating incentives in the market.
Thus, business environment reform helps private enterprises and their ability to compete and manage risk.
Governments are in charge of the business environment and its reform. They set the policy frameworks and the legislative and regulatory instruments. Governments also establish administrative procedures to enact and implement these measures. Indeed, it is the roles of the government in regulating markets and stimulating industries that are particularly interesting in this work. This includes the topics of red tape reduction and regulatory best practice.
However, governments do not do this alone.
Business representative organisations and other civil society organisations can influence government and create a demand for change (i.e., for business environment reform). Business representative organisations engage in dialogue with government–known as public private dialogue–to share their perspectives and to help government better understand what it is like to navigate the business environment.
Beyond dialogue, business representative organisations can also advocate for business environment reform.
In developing and emerging economies, donor and development agencies can support these processes. The agencies can work with government and business representative organisations to improve the effectiveness, efficiency and sustainability of business environment reform.
Key themes on business environment reform
The DCED Guidelines identified the following “functional areas” of BER that have a “direct impact on setting the environment for private enterprise operation”:
- Simplifying business registration and licensing procedures
- Improving tax policies and administration
- Enabling better access to finance
- Improving labour laws and administration
- Improving the overall quality of regulatory governance
- Improving land titles, registers and administration
- Simplifying and speeding up access to commercial courts and to alternative dispute resolution mechanisms
- Broadening public-private dialogue processes with a particular focus on including informal operators, especially women
- Improving access to market information
Evidence and best practice
There is a wide body of evidence and best practice produced over the years on the effectiveness, efficiency and sustainability of programmes designed to support reform in developing and emerging economies. It is not possible to cover all this here, but the following may be of particular interest.
Current business environment reform topics based on context:
Supporting reform in subnational territories. This often includes a consideration of the links between business environment reform and local economic development. Business environment reforms are a critical strategy in addressing the barriers faced in disadvantaged and lagging regions and localities.
Supporting reform to address the challenges created by high levels of informality. Many developing economies have a disproportionally large informal economy. While this was once seen as the result of a poor business environment, it is now clear this is not the case. There are many factors contributing to the size of the informal economy and these vary by country and region. Business environment reforms can be used to support a transition from informality to formality, especially when combined with complementary support services and programmes. In addition, reforms can be used to address some of the specific challenges faced by informal business owners, managers and workers.
Supporting reform in fragile and conflict-affected situations. Given the significant number of fragile countries around the world, there is a critical need to support private sector development and economic growth. Business environment reform contributes to this and, importantly, can improve government capabilities and foster trust between fragile, under-capacitated governments and the business community.
Targeting reforms towards the small businesses. As indicated, small businesses disproportionately suffer within a poor business environment. However, this does not necessary mean that reforms should be made to benefit small businesses alone. Improvements in the business environment for all private enterprises will assist small business and avoid the dangers of growth traps (i.e., where a business is indirectly encouraged to keep small because it is easier and cheaper to do business). However, there are other reforms that can improve the conditions for small business and encourage small business development. See my 2018 paper.
Targeting reforms to improve conditions for women. Much has been learned from a gender perspective on business environments. Women can face structural, procedural and attitudinal barriers in the business environment that disproportionally affect them compared to men. Women’s economic employment requires reforms designed to remove barriers to market participation, while all business environment support programmes should monitor impact on women (i.e., female business owners, managers and workers).
Recently, attention has been given to how business environment reform can be used to respond to the challenges created by the coronavirus pandemic (COVID-19). This includes use of reforms to promote resilience and to address market disruptions.
The business environment is a narrowly defined element of the investment climate. Governments manage the business environment and are responsible for leading reform efforts. However, this is best done in collaboration with the business community and other civil society organisations. Developing country governments can also benefit from the support of international donor and development agencies. Business environment reform is a crucial element in private sector development. It can be applied to address a number of strategically important barriers to increasing private investment in the economy and to improving the competitiveness of local enterprises in markets.