A truly Global Britain must slash bureaucracy to draw in international investment
Not that long ago there was an assumption that globalisation was inevitable – writers from Fukayama to Friedman were anticipating the victory of liberal capitalism and a “flat world” in which capital, people and trade flowed freely, driven by the power of big business to knock down national barriers to their pan-national corporate interests.
That certainty about the positive and inexorable globalisation of the world economy feels like a distant memory. In the last decade a global financial crisis, US-China trade tensions, the election of many populist governments, Brexit, the take-off of digital revolution, the hottest decade on record and now a pandemic have created a much more divided world politically, socially, environmentally and economically.
While globalisation has helped lift an extraordinary number of people out of extreme poverty – 850 million in China alone according to the World Bank – it has also created winners and losers, whether the left-behinds in more developed economies, the tax take of their governments or the externalities of economic growth hitting the environment.
Precious few voices are now arguing for the merits of the market, or global trade or for simplifying the rules of business. This means slashing bureaucracy on a national level in order to facilitate international trade, rather than relying on an ever-closer world to buoy up economies without effort from central governments.
For the last eight years, we have measured global business complexity, capturing 290 criteria for operating a business in 77 different countries representing 92 per cent of world GDP. These are important metrics: How long does it take to register a company? Can it be done online or does paperwork need to be stamped? What are the rules around parental leave? Can tax owed in one jurisdiction be paid from a bank account in another?
There is a strong inverse relationship between the complexity of operating in a country and the prosperity of its people. That doesn’t prove causality, but does point to complexity as an inhibitor of wealth creation, whether for local entrepreneurs setting out to build home-grown businesses or outside investors coming in, creating employment and paying taxes.
By our measure, Brazil and France are the first and second most complex places to do business. The reasons are rooted in structure and culture and unlikely to change soon. Brazil operates city, regional and federal laws reflecting its political structure. France has a 3,000 page ‘code du travail’ reflecting national sentiment on the proper protections for employees even if it makes employing people less attractive.
At the other end, Denmark is the simplest place to do business. Off-shore locations – driven by investments in digital processes and competition to attract investors – are often amongst the least complex places to operate and one may expect to see such a jurisdiction occupy the top spot on our ranking. However, Denmark has balanced simple rules for doing business with Nordic sensibilities for high tax, social justice and environmental protection. These are characteristics one may associate with the Nordic way of life, but alongside these priorities Denmark has done a great deal to eliminate unnecessary bureaucracy and sluggish processes that could otherwise restrict investment or deter businesses from operating there.
Despite the proliferation of international agreements and efforts to standardise certain regulations, wealth creation will continue to swing to the countries that make it easier to do business in. Tax may be a factor for some, but that hardly explains Denmark’s success. There is limited correlation between headline corporation tax rates and foreign direct investment, despite many of our assumptions. That means even with the G7 proposals fully in force, places like Ireland which ranked 4th least complex, will have other ways to attract investment in comparison to more complicated places.
Our research does not just consider the implications for businesses looking to move into fast-growing markets. Each country has a story to tell and this year the UK has improved its position in our rankings, moving up to be the 19th least complex place this year – up from 33rd in 2020. Much of this reflects uncertainty of the Brexit settlement being largely resolved.
It does, though, leave the UK well below European rivals including Denmark, Ireland and Netherlands – all three in the ten least complex countries to do business. Boris Johnson has been pushing for a Global Britain agenda to help UK companies trade abroad, but ministers should be looking closer to home to bring in outside investment. So far, what thinking there has been on this issue tends to focus on the City and financial services, but a broader ambition to attract international investment should not be neglected.
Internationally, there have been a slew of initiatives with alphabet soup acronyms (FATCA, BEPS, CRS) designed to create global rules around things like accounting, tax and transparency. Whilst there’s something to be said for coordinated action, it also runs the risk of creating a patchwork quilt of partly adopted global rules which coexist with local ones. National governments control the rules for operating in their country.
Governments need to decide how far they want to stimulate their own economies by making it easier to invest and operate in their country. That doesn’t mean giving in to corporate interests. It means tackling the bureaucracy that helps no-one (except possibly the bureaucrats) and for which a country’s own citizens ultimately pay the price. Whether we’re talking about an advanced economy like the UK or a fast-growing country like Ethiopia, simplicity is the lubricant in the engine of growth.