China vs. India: Which is better for doing business?

Editor's Note: Peter Kusek is an Investment Policy Officer with the Investment Climate Advisory Services of the World Bank Group.

Doing Business has just published its seventh annual report for 2010.  As in the past, it includes its flagship Ease of Doing Business rank, which is once again led by high-income economies such as Singapore, New Zealand, Hong Kong (China) and the United States.  That’s not a surprise. 

What some of us might however not expect is to find countries such as Georgia, Saudi Arabia or Mauritius among the top 20.  Does this mean that these countries are amongst the world’s 20 most desirable and attractive business destinations?  Well, yes and no, depending on how you define attractiveness.  Let’s do the following quick business exercise together:

I am an investor looking to expand my enterprise and venture beyond the borders of my country.  All my buddies are telling me that China and India are the places to go, but before I follow their advice I decide to snoop around the Internet and see what other folks are saying.  As I expect, information abounds so I decide to restrict my search and only check out various lists of countries which rank the world markets based on their business attractiveness.  Still, there are too many so I zero in on the following six lists which seem to come up most often in my search:

• Global Competitiveness Index from the World Economic Forum
• Ease of Doing Business Index from the Doing Business project at the World Bank Group
• Index of Economic Freedom from the Heritage Foundation
• Business Environment Rankings of the Economist Intelligence Unit
• FDI Confidence Index from A.T. Kearney
• World Competitiveness Yearbook by IMD

I am curious how China and India compare on these rankings, and I will throw in Brazil and Russia to cover all four BRICs.  As a busy businessman I don’t have the time to correlate or standardize the data, so I am just going to create a simple table showing the position of the countries on each of the ranks.

What do I see?  Well, a rather confusing picture.  On one hand, the FDI Confidence Index tells me that there is no better place in the world to go than China.  On the other hand China is towards the bottom of the Index of Economic Freedom, and Doing Business puts it somewhere in the middle of their distribution.  Russia is a clear loser on most of these ranks with the exception of Doing Business, which places it above both India and Brazil.  India scores worst on the Doing Business rank, yet all other ranks think it’s the second best BRIC country to go right after China.  In several of the rankings China is at the top and Russia at the bottom.  In EIU’s Business Environment rankings, these two countries are in the middle and Brazil is the best and India the worst performer of the four countries.

So who is wrong and who is right?  They are all right in their own way.  The thing is that we are sort of comparing apples and oranges.  While our six ranks all measure some aspect of business attractiveness, they all come at it from a different angle and it’s these differences in methodology that are really key in interpreting results.  Some focus specifically on foreign investment while others examine the quality of business conditions for all enterprises.  More specifically,

• Global Competitiveness Index is the most comprehensive of our indices and includes hard data as well as business opinions on a range of issues including institutions, labor, infrastructure and health. It does not have a specific business focus, but rather it assesses the ability of countries to provide high levels of prosperity to their citizens.
• Ease of Doing Business Index measures the quality of regulations and efficiency of business-government transactions for domestically owned small and medium-size enterprises (SMEs). It does not measure macroeconomic conditions, corruption, cost of labor and capital, or other factors which affect the likely profitability of new business ventures.
• Index of Economic Freedom covers ten areas including trade freedom, business freedom, investment freedom, and property rights. It relies on secondary sources of information rather than business interviews.
• Business Environment rankings examine ten separate criteria covering the political environment, macroeconomic environment, market opportunities, policy towards free enterprise and competition, and others.
• FDI Confidence Index is based on a survey of top executives who are asked about the future prospects for foreign direct investment (FDI) in each of the measured countries.
• World Competitiveness Yearbook looks at five main areas of economic performance, government efficiency, business efficiency and infrastructure.

So what are we learning from all this?  One key lesson surely is that we should not blindly trust any set of indicators and country rankings that might result from them.  Indicators are exactly what their name says they are—data which are only indicative, rather than definitive in measuring a particular issue.  Each of the six indices we looked at has its own unique methodology and target audience, and conflating all of them together will usually muddle the picture instead of adding clarity.  Business people, governments and academics should be prudent in using these numbers beyond their intended purpose and in extrapolating far-reaching conclusions about how countries actually compare to one another. 

So is China still the place for my business?  I might have to do a little more research on that.