A Performance Indicator in Regulation and Compliance
Business Freedom Component of the Index of Economic Freedom
Summary: The Business Freedom Component of Index of Economic Freedom (IEF) is one of the ten constituents of a country ranking measure created by The Heritage Foundation and The Wall Street Journal in 1995. The IEF assigns a grade in each using a scale from 0 to 100, where 100 represents the maximum freedom.
The 2013 data can be found at: http://www.heritage.org/index/explore.
Methodology: Business freedom is an overall indicator of the efficiency of government regulation of business. The quantitative score is derived from an array of measurements of the difficulty of starting, operating, and closing a business. The business freedom score for each country is a number between 0 and 100, with 100 equaling the freest business environment. The score is based on 10 factors, all weighted equally, using data from the World Bank’s Doing Business study:
- Starting a business—procedures (number);
- Starting a business—time (days);
- Starting a business—cost (% of income per capita);
- Starting a business—minimum capital (% of income per capita);
- Obtaining a license—procedures (number);
- Obtaining a license—time (days);
- Obtaining a license—cost (% of income per capita);
- Closing a business—time (years);
- Closing a business—cost (% of estate); and
- Closing a business—recovery rate (cents on the dollar).
Each of these raw factors is converted to a scale of 0 to 100, after which the average of the converted values is computed. The result represents the country’s business freedom score. For example, even if a country requires the highest number of procedures for starting a business, which yields a score of zero in that factor, it could still receive a score as high as 90 based on scores in the other nine factors. Canada, for instance, receives scores of 100 in nine of these 10 factors, but the 14 licensing procedures required by the government equate to a score of 64.5 for that factor.
Each factor is converted to a scale of 0 to 100 using the following equation:
Factor Scorei = 50 factoraverage/factori
which is based on the ratio of the country data for each factor relative to the world average, multiplied by 50. For example, on average worldwide, it takes 18 procedures to get necessary licenses. Canada’s 14 licensing procedures are a factor value better than the average, resulting in a ratio of 1.29. That ratio multiplied by 50 equals the final factor score of 64.5.
For the six countries that are not covered by the World Bank’s Doing Business report, business freedom is scored by analyzing business regulations based on qualitative information from reliable and internationally recognized sources.
Unless otherwise noted, the Index relies on the following sources in determining business freedom scores, in order of priority: World Bank, Doing Business 2013; Economist Intelligence Unit, Country Commerce, 2009–2012; U.S. Department of Commerce, Country Commercial Guide, 2009–2012; and official government publications of each country.
Source: http://www.heritage.org/index/book/methodology (accessed 12 July 2013).
Page Created By: Madina Junussova and Ian Clark on 12 July 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.