Moving toward a more hospitable environment for business

The operating and regulatory environments in developing countries can be challenging. Micro and small businesses especially face disadvantages. If they are informal, they cannot get investment finance, participate in value chains of larger companies, or sometimes even legally receive services from utilities. Condemned to remain small, they cannot generate wealth or many jobs. Nor do they contribute to the broader economy by paying taxes.

Most face barriers to joining the formal economy in the form of antiquated regulations and prohibitive requirements—dozens of steps, delays of many months, capital requirements beyond attainment for most of the BOP. In El Salvador, for example, starting a legitimate business used to take 115 days and many separate procedures—until recent reforms reduced the effort to 26 days and allowed registration with four separate agencies in a single visit. But even for legitimate small businesses, investment capital is generally unavailable and supporting services scarce.

Fortunately, there is growing recognition of the importance of removing barriers to small and medium-size businesses and a growing toolbox for moving firms into the formal economy and creating more efficient markets. And as the World Bank and International Finance Corporation (IFC) show, in their annual Doing Business reports, there is also mounting evidence that the tools work. In El Salvador five times as many businesses register annually since its reforms. Many countries, including China, have dropped minimum capital requirements. The pace of reform is accelerating, with more than 40 countries making changes in the most recent year surveyed.

Coupled with reform is growing attention to enterprise development initiatives focusing on BOP markets and investment capital for small and medium-size businesses. Several international and bilateral development agencies are launching investment funds to support the growth of small and medium-size enterprises across the developing world. These efforts, and the growing private sector interest in investing in such enterprises in developing countries, explicitly recognize that an expanded private sector role and a bottom-up market approach are essential development strategies.