Thursday, November 6, 2014

Doing business in Korea ― going beyond ranking

First published in The Korea Herald.

A World Bank report released last week ranked South Korea as having the fifth-best business environment among 189 countries this year. Commendably, the country also topped the Group of 20 emerging and advanced countries and came in third among Organization for Economic Cooperation and Development member countries.

Between June 2013 and June 2014, “Doing Business 2015: Going Beyond Efficiency,” which measures 189 economies worldwide, documented 230 business reforms, with 145 aimed at reducing the complexity and cost of complying with business regulations, and 85 reforms aimed at strengthening legal institutions.

Only Singapore, New Zealand, Hong Kong and Denmark ranked higher than South Korea.

Not surprisingly, the Finance Ministry was elated. In an official statement, it noted that this is two notches above its rank in the previous year. What is more, all the Korean media outlets picked it up and highlighted it, without crosschecking.

The rank actually remains the same, after adjustment, the World Bank has noted. But that is just a minor issue, and we cannot really fault the Finance Ministry for glossing over the fact.

A closer look at the data, which the ministry has also ignored, suggests that not everything is as rosy as it is made out to be. The ministry has attributed this rank to “improvements in regulations and the system for starting a business, granting construction permits and protecting minor investors.”

This is not entirely true, if we take a look at what the data actually shows.

The factors that are scrutinized to compile the ranking include starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

The World Bank data reveals that South Korea has slipped in many of these parameters. In starting a business, South Korea’s rank slid from 16th to 17th this year; for registering property, it slipped from 78th to 79th; for getting credit, it dropped six notches from 30th to 36th; and in paying taxes, it slipped from 24th to 25th.

The country’s rank is stagnant is other parameters such as dealing with construction permits, trading across borders, enforcing contracts and resolving insolvency.

There is one parameter in which South Korea has shown improvement, and that is protecting minority investors. Its rank has climbed from 26th to 21st, but the country still has a long way to go.

It is only in providing electricity to businesses that South Korea is ranked first, and for that, the government can be proud.

These numbers beg the question: Has the situation really improved on the ground for investors wanting to start a business in South Korea? The figures speak for themselves.

The Finance Ministry said the improved ranking in business environment could have a “positive” impact on luring more foreign investment.

In the first half of 2014, South Korea’s FDI recorded historic highs for amounts declared and received. The amount declared was $10.33 billion, with annualized growth of 29.2 percent from $8 billion in the same period of 2013. The amount received was $7.2 billion, rising 55.9 percent from $4.62 billion on-year.

However, foreign investors do not just look at the overall rank when they explore opportunities here. They also get into the nitty gritty of all the issues outlined in the World Bank report, as well as the country’s labor market regulations.

If the government is serious about luring more investment and competing in Asia for investors, it has much left to do in terms of improving the business environment and raising South Korea’s rank in all the parameters.

As the World Bank has noted, a high overall ranking does mean that the government has created a regulatory environment conducive to operating a business. However, it added, “While this ranking tells much about the business environment in an economy, it does not tell the whole story. The ranking on the ease of doing business, and the underlying indicators, do not measure all aspects that matter to firms and investors or that affect the competitiveness of the economy.”