Starting a Foreign Business Methodology

The Starting a Foreign Business indicators quantify the procedural burden that foreign companies face when entering a new market. They build on the data gathered by the Doing Business starting a business indicator and highlight areas that are of specific interest to foreign investors. Consideration is given to both the regulatory framework and its implementation in practice, thus ensuring a more comprehensive measure of the business environment faced by investors. The Starting a Foreign Business indicators comprise 3 components measuring the time, procedural steps, and regulatory regime for establishing a foreign-owned subsidiary (shown in the box below).

What the Starting a Foreign Business indicators measure

1. Procedures (number): This indicator covers the number of procedural steps involved in establishing a wholly foreign-owned subsidiary. Both pre- and post-incorporation procedures that are of­ficially required for a foreign investor to formally operate a business are recorded.

2. Time (days): This indicator measures the number of days needed for each of the procedural steps required to establish a subsidiary of a foreign company.

3. Ease of establishment index: This index evaluates the characteristics of the regulatory regimes for business start-up. It focuses on the following areas:

  • Restrictions on the composition of the board of directors or appointment of managers.
  • Requirements forcing the use of a local third party (counsel, notary, investment promotion agency) during the establishment process.
  • Possibility of expediting establishment procedures through an official channel (availability of fast-track procedures).
  • Requirement of an investment approval (nature of investment approval requirement, possibility of appeal, minimum required amount of investment, period of validity).
  • Business registration process.
  • Restrictions on holding a foreign currency bank account.
  • Minimum capital requirements.
  • Availability of electronic services (online laws, regulations, documents, and registration).

Procedures

The Starting a Foreign Business indicators record all the procedures required to establish a wholly foreign-owned, domestically incorporated company. IAB uses information from the Doing Business project on the procedures required to start a locally owned SME as a basis for its data. i Based on the experience of the expert survey respondents, the additional procedures required of foreign companies with IAB case study’s characteristics is then added to the Doing Business list of procedures. In some countries, there is no difference between the requirements for domestic and foreign companies, and in that case IAB’s list of procedures is identical to that of Doing Business. In most countries, however, foreign companies are required to complete additional administrative steps, such as submitting authenticated legal documentation of the parent company, obtaining a trade license, or acquiring an investment approval.

A procedure is defined as any interaction of the parent company or its legal representatives with external parties (for example, government agencies or notaries). Interactions between company founders or company officers and employees are not counted as procedures. Procedures that must be completed in the same building, but in different offices, are counted as separate procedures. If the same office has to be visited several times for different sequential procedures, each is counted separately. Each electronic procedure is counted separately. If 2 procedures can be completed through the same Web site but require separate filings, they are counted as 2 procedures.

Both pre- and post-incorporation procedures that are officially required for a foreign company to formally operate a business are recorded. Only procedures required of all businesses are covered; industry-specific procedures are excluded. For example, procedures to comply with environmental regulations are included only when they apply to all businesses conducting general commercial or industrial activities. Procedures that the company undergoes to connect to electricity, water, gas, and waste disposal services are not included.

Procedures required for official correspondence or transactions with public agencies are also included. For example, if a company seal or stamp is required on official documents, such as tax declarations, obtaining the seal or stamp is counted. Similarly, if a company must open a bank account before registering for sales tax or value added tax, this transaction is included as a procedure. Shortcuts are counted only if they fulfill 4 criteria: they are legal, they are available to the general public, the majority of companies use them, and avoiding them causes substantial delays.

Time

Time is recorded in calendar days. The measure captures the median duration that incorporation lawyers and other expert respondents indicate is necessary to complete each procedure, with minimum follow-up with government agencies and no extra payments. It is assumed that the minimum time required for each procedure is 1 day. Although procedures may take place simultaneously, they cannot start on the same day (that is, simultaneous procedures start on consecutive days). A procedure is considered completed once the company has received the final document, such as the company registration certificate or tax number. If a procedure can be fast-tracked for an additional fee, the fastest procedure is chosen. It is assumed that the foreign company does not waste time and commits to completing each remaining procedure without delay. The time that the foreign company spends on gathering information is discounted.

Ease of establishment index

The Ease of establishment index evaluates the characteristics of the regulatory regimes for business start-up. The index takes values from 0 to 100, where higher values denote a start-up regime with fewer to no legal and administrative restrictions on the establishment process. The table below presents a complete list of survey questions about the start-up regime characteristics that constitute the Ease of establishment index. The last column illustrates how each question is scored. Higher scores indicate best practice.

Ease of establishment index survey questions and scores

Survey questions comprising the Ease of establishment index

How the question was scored

Example: Canada

Are your laws and regulations available online through a public institution’s Web site (for example parliament, official gazette)?


“Yes” = 1 or “No” = 0


Yes = 1

Does your country have any restrictions on the composition of the board of directors of foreign-owned but locally incorporated companies (such as nationality, ethnicity, race, gender)?

“Yes” = 0 or “No” = 1

No = 1

Is the parent company required by law to establish its subsidiary through a local private third party?

“Yes” = 0 or “No” = 1


No = 1

Is the parent company required by law to establish its subsidiary through a public entity?

“Yes” = 0 or “No” = 1

No = 1

Is the investment approval/authorization a mere formality, only requiring submitting a notification to an appropriate authority?

“N/A” = 1, “Yes” = 0.5, or “No” = 0

Yes = 0.5

Does your country give the investor the right to appeal the decision on the investment approval/authorization?

“N/A” = 1, “Yes” = 0.5, or “No” = 0

N/A = 1

Is a minimum of projected annual sales required for an investment approval/authorization?

“N/A” = 1, “Yes” = 0.5, or “No” = 0

N/A = 1

Is there a limit on the period of validity of a foreign investment approval (apart from any operational licenses/permits that need to be renewed)?

“N/A” = 1, “Yes” = 0.5, or “No” = 0

N/A = 1

Do laws and regulations specify a time limit within which authorities must notify the foreign company of the result of its registration?

“Yes” = 1 or “No” = 0

No = 0

If Yes, is this limit usually respected?

“Yes” = 1, “No” or “N/A” = 0

N/A = 0

Is the company registration documentation downloadable online?

“Yes” = 1 or “No” = 0

Yes = 1

If Yes, can the investment registration documentation be submitted online?

“Yes” = 1, “No” or “N/A” = 0

Yes= 1

Can the registration process be monitored online? (checking the status of registration)

“Yes” or “N/A” = 1, “No” = 0

N/A = 1

Can the foreign company hold a commercial bank account in a foreign currency in your country?


“Yes” = 1 or “No” = 0

Yes = 1

If Yes, must the foreign company seek approval/authorization before opening such an account?

“Yes” or “N/A = 0, “No” = 1

No = 1

If Yes, how long does it take, on average, to receive such an approval/ authorization?

“N/A” = 1
1–10 days = 0.6
11–40 days = 0.3
Over 41 days = 0

N/A = 1

Does your country have a paid-in capital requirement for a foreign-owned limited liability company?

“Yes” = 0 or “No” = 1

No = 1

If Yes, is this requirement a different amount than that for domestic companies?


“Yes” = 0 except in countries where this requirement is more favorable for foreign than domestic companies; “N/A” or “No” = 1


N/A = 1

Is your country a party to the Hague Apostille Convention?

“Yes” = 1 or “No” = 0

No = 0

Points

Total possible = 20

Canada = 16.5

Canada’s score on the Ease of establishment index, normalized on a 0–100 scale

82.5

Bonus Question

Can the parent company expedite any of the establishment procedures through an official channel (fast-track procedure)?

“Yes” = + 1, “No” or “N/A” = Not scored


The federal incorporation process takes on average 5 days to complete. No fast-track procedure is available.
No = Not scored

Canada total points + bonus:

16.5 (out of 20)

Canada’s index score:

82.5 (out of 100)

All questions receive equal weight in the construction of the index. Alternative sets of weights, based on expert judgment and principal component analysis, were also tested. The bonus question is only scored if the economy includes the practice, and like all other questions is equally weighted. The results obtained by using each of the methodologies were highly correlated with each other. In the interest of simplicity, consistency with the other IAB topics, and ease of replicability, equal weighting was selected as the preferred methodology. As can be seen in the example above, Canada scored 16.5 points out of a maximum total of 20 points. Because the Ease of establishment index is measured on a scale of 0–100, Canada scores 82.5 on this index.

The case study assumptions

To ensure consistency and comparability of data across all 87 countries, the Starting a Foreign Business indicators are based on a case study setting out assumptions about a foreign company that is establishing a local subsidiary. The intent of IAB is to define by means of the case study a foreign company’s standard, representative investment project, one that does not receive any extraordinary treatment from the public authorities.

The foreign company:

  • Will be locally incorporated in the host country’s largest business city as a limited liability company (LLC) or equivalent of this legal form applicable to the country.
  • Will be wholly foreign-owned and controlled by its parent company.
  • Is being established by a parent company, which is a multinational private company with no equity interest or management control by the government of its home country (that is, the investor is not a state-owned enterprise or a sovereign wealth fund).
  • Will be the parent company’s first investment project in the host country.
  • Plans an initial capital investment of $10,000,000.
  • Plans to manufacture electric household appliances (such as electric or microwave ovens). Its manufacturing facility will be located on the outskirts of the host country’s largest business city.
  • Plans to initially employ 50 people.
  • Is not applying to receive any special benefits and privileges from the host country (for example, extraordinary tax holidays, breaks, or exemptions; customs duty exemptions), apart from the investment incentives available automatically on a legal basis.
  • Will not be investing in an EPZ, SEZ, or any other zone governed by a special FDI regime in the host country.
  • Plans to sell its manufactured product locally as well as to export it. However, it does not want to pre-commit to any specific export requirements.

Will import about 60–70% of the value of its production inputs other than its capital equipment.

Limitations of the starting a foreign business indicator

  • The process for establishing a foreign-owned subsidiary may differ by city, province, or region within countries -- especially large or federal countries. The Starting a Foreign Business indicators assume that the establishment process occurs in the country’s largest business city and do not explore possible variations in other parts of the country.
  • Because the case study stipulates that a subsidiary will be established as a limited liability companies (LLC), the Starting a Foreign Business indicators do not measure the number of procedures required to establish other type of a business (such as corporation or partnership). The indicators also do not consider other types of foreign investment projects (such as joint ventures, licensing agreements, or establishment of branch offices), which are often treated differently -- both by law and in practice -- than foreign subsidiaries.
  • The case study also stipulates that the foreign subsidiary will be operating a manufacturing facility and engage in international trade (importing some production inputs and exporting some manufactured goods). Thus the indicators consider obtaining a trade license a required procedure for the start-up process.
  • Because the foreign company is assumed not to be applying for special benefits or privileges from host countries (such as extraordinary tax holidays, breaks, or exemptions; or customs duty exemptions) apart from automatic investment incentives, procedures that are only required to obtain special benefits are not considered essential to the start-up process.
  • The indicators also do not cover the following types of licenses:
    • Sector-specific licenses (such as exploration or mining permits).
    • Permits for international and domestic (including municipal) health, food safety, and product and labor standards and regulations.
    • Work and residency permits for foreign employees, though these play an important role in the start-up a foreign-owned subsidiary.
    • Government reviews of foreign acquisitions in sensitive and strategic sectors. Such reviews are often conducted for reasons of national, economic, and trademark security and protection.


    i - The list of Doing Business procedures for starting a business in each economy can be found at http://www.doingbusiness.org/ExploreTopics/StartingBusiness/.