A multivariate study on Ease of Doing Business to predict a country

TABLE OF CONTENTS

ACKNOWLEDGEMENT

INTRODUCTION
1.1 Doing Business
1.2 Ease of doing business index
1.3 Starting a Business Methodology
1.4 Dealing with Construction Permits Methodology
1.5 Getting Electricity Methodology
1.6 Registering Property Methodology
1.7 Getting Credit Methodology
1.8 Protecting Investors Methodology
1.9 Paying Taxes Methodology
1.10 Trading Across Borders Methodology
1.11 Enforcing Contracts Methodology
1.12 Resolving Insolvency Methodology
1.13 OBJECTIVES
1.14 SOURCE OF DATA
1.15 VARIABLE DESCRIPTION
1.16 PROCEDURES

METHODOLOGY
2.1 Factor Analysis
2.1.1 Introduction
2.1.2 Orthogonal Transformation
2.1.3 Assumption:
2.1.4 Parameter Reduction
2.1.5 Trivial case
2.1.6 Principal Component (Principal Factor) Method
2.1.7 Factor Rotation
2.1.8 Criterion for choosing the orthogonal matrix [Varimax criterion]
2.1.9 Factor Scores
2.2 MULTIPLE LINEAR REGRESSIONS
2.2.1 Data and Sample regression model
2.2.2 Assumptions:
2.2.3 Estimation of the regression parameters
2.2.4 Properties of LSE’s
2.2.5 Prediction and Residuals
2.2.6 Decomposition of the overall variability in the data
2.2.7 Estimation of σ2
2.2.8 Hypothesis Testing in multiple linear regressions
2.2.9 Coefficient of determination (R2) and Adjusted R2
2.2.10 Multicollinearity
2.2.11 Multicollinearity Diagnostics
2.2.12 Remedial Measures for Multicollinearity

ANALYSIS & OUTPUT
3.1 Factor Analysis:
3.2 Multiple Linear Regressions:
3.3 Variance Inflation Factors
3.4 Rank Method

CHAPTER 4 CONCLUSIONS
4.1 Conclusions

CHAPTER 5 APPENDIX
APPENDIX A – Code for Factor Analysis
APPENDIX B – Code for Correlation
APPENDIX C – Code for Variance Inflation Factors
APPENDIX D – Code for Multiple Linear Regressions
APPENDIX E – Code for Ranking
APPENDIX F - Sample Data

BIBLIOGRAPHY

ACKNOWLEDGEMENT

I thank and praise the Lord Jesus Christ for all the graces He has showered on me, throughout the course of my project.

I wish to express my profound gratitude and indebtedness to my Project Guide and mentor Prof Xavier for his guidance and support through timely advice and selfless help rendered and encouragement right from the beginning of this project. The period of this project was a very good learning experience under his valuable guidance.

I am extremely thankful to Dr. C. Santharam , as a Head, Department of Statistics, Loyola College, Chennai for providing me with all available facilities and enabling me to do my work with great interest and ease.

I thank Rev. Dr. G. Joseph Antony Samy, S.J., Principal, Loyola College, Chennai for providing me the facilities. I would like to express my sincere thanks to all the faculty members of the Department of Statistics, Loyola College (Autonomous), Chennai-34, for their kind help and goodwill in completing M.Sc. Course.

My deepest gratitude to Prof. M. Syluvai Antony of Statistics Department for his selfless support throughout the project.

I am deeply grateful and thankful to my parents and friends for their valuable prayers, support and encouragement. They have been a source of inspiration to me and I thank them for their valuable help in the successful completion of my project work.

Sugabalan S

CHAPTER 1

INTRODUCTION

1.1 Doing Business

The Doing Business Report (DB) is a study elaborated by the World Bank Group since 2003 every year that is aimed to measure the costs to firms of business regulations in 189 countries in 2012.The study has become one of the flagship knowledge products of the World Bank Group in the field of Private Sector development, and is claimed to have motivated the design of several regulatory reforms in developing Countries The study presents every year a detailed analysis of costs, requirements and procedures a specific type of Private Firm is subject in all countries, and then, creates rankings for every country. The study is also backed up by broad communication efforts, and by creating rankings, the study spotlights countries and leaders that are promoting reforms.

1.2 Ease of doing business index

The ease of doing business index is an index created by the Bank. Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights. The index is based on the study of laws and regulations, with the input and verification by more than 9,600 government officials, lawyers, business consultants, accountants and other professionals in 185 economies who routinely advise on or administer legal and regulatory requirements.

The ease of doing business index is meant to measure regulations directly affecting businesses and does not directly measure more general conditions such as a nation's proximity to large markets, quality of infrastructure, inflation, or crime. A nation's ranking on the index is based on the average of 10 sub-indices:

- Starting a business – Procedures, time, cost and minimum capital to open a new business
- Dealing with construction permits – Procedures, time and cost to build a warehouse
- Getting electricity – procedures, time and cost required for a business to obtain a permanent electricity connection for a newly constructed warehouse
- Registering property – Procedures, time and cost to register commercial real estate
- Getting credit – Strength of legal rights index, depth of credit information index
- Protecting investors – Indices on the extent of disclosure, extent of director liability and ease of shareholder suits
- Paying taxes – Number of taxes paid, hours per year spent preparing tax returns and total tax payable as share of gross profit
- Trading across borders – Number of documents, cost and time necessary to export and import
- Enforcing contracts – Procedures, time and cost to enforce a debt contract
- Resolving insolvency – The time, cost and recovery rate (%) under bankruptcy proceeding.

1.3 Starting a Business Methodology

Doing Business records all procedures officially required, or commonly done in practice, for an entrepreneur to start up and formally operate an industrial or commercial business, as well as the time and cost to complete these procedures and the paid-in minimum capital requirement. These procedures include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with relevant authorities. The ranking on the ease of starting a business is the simple average of the percentile rankings on its component indicators.

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After a study of laws, regulations and publicly available information on business entry, a detailed list of procedures is developed, along with the time and cost to comply with each procedure under normal circumstances and the paid-in minimum capital requirement. Subsequently, local incorporation lawyers, notaries and government officials complete and verify the data.

1.4 Dealing with Construction Permits Methodology

Doing Business records all procedures required for a business in the construction industry to build a warehouse (figure 1). These procedures include obtaining and submitting all relevant project-specific documents (for example, building plans, site maps and certificates of urbanism) to the authorities; hiring external third-party supervisors, engineers or inspectors (if necessary); obtaining all necessary clearances, licenses, permits and certificates; submitting all required notifications; and requesting and receiving all necessary inspections (unless completed by a private, third-party inspector)

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Doing Business also records procedures for obtaining connections for water, sewerage and a fixed landline Procedures necessary to register the property so that it can be used as collateral or transferred to another entity are also counted. The questionnaire divides the process of building a warehouse into distinct procedures and solicits data for calculating the time and cost to complete each procedure. The ranking on the ease of dealing with construction permits is the simple average of the percentile rankings on its component indicators.

Information is collected from experts in construction licensing, including architects, civil engineers, construction lawyers, construction firms, utility service providers and public officials who deal with building regulations, including approvals, permit issuance and inspections.

1.5 Getting Electricity Methodology

Doing Business records all procedures required for a business to obtain a permanent electricity connection and supply for a standardized warehouse (figure 1). These procedures include applications and contracts with electricity utilities, all necessary inspections and clearances from the utility and other agencies and the external and final connection works. The questionnaire divides the process of getting an electricity connection into distinct procedures and solicits data for calculating the time and cost to complete each procedure . The ranking on the ease of getting electricity is the simple average of the percentile rankings on its component indicators.

Data are collected from the electricity distribution utility, then completed and verified by electricity regulatory agencies and independent professionals such as electrical engineers, electrical contractors and construction companies. The electricity distribution utility consulted is the one serving the area (or areas) where warehouses are located. If there is a choice of distribution utilities, the one serving the largest number of customers is selected.

To make the data comparable across economies, several assumptions about the warehouse and the electricity connection are used.

1.6 Registering Property Methodology

Doing Business records the full sequence of procedures necessary for a business (buyer) to purchase a property from another business (seller) and to transfer the property title to the buyer’s name so that the buyer can use the property for expanding its business, use the property as collateral in taking new loans or, if necessary, sell the property to another business. The process starts with obtaining the necessary documents, such as a copy of the seller’s title if necessary, and conducting due diligence if required. The transaction is considered complete when it is opposable to third parties and when the buyer can use the property, use it as collateral for a bank loan or resell it (figure 1). The ranking on the ease of registering property is the simple average of the percentile rankings on its component indicators (figure A.1).

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Every procedure required by law or necessary in practice is included, whether it is the responsibility of the seller or the buyer or must be completed by a third party on their behalf. Local property lawyers, notaries and property registries provide information on procedures as well as the time and cost to complete each of them. The registering property indicators do not measure the accessibility of property registration systems, the legal security offered by formal registration, the use of informal property registration systems or the equity of land policies.

To make the data comparable across economies, several assumptions about the parties to the transaction, the property and the procedures are used.

1.7 Getting Credit Methodology

Doing Business measures the legal rights of borrowers and lenders with respect to secured transactions through one set of indicators and the sharing of credit information through another. The first set of indicators measures whether certain features that facilitate lending exist within the applicable collateral and bankruptcy laws. The second set measures the coverage, scope and accessibility of credit information available through public credit registries and private credit bureaus. The ranking on the ease of getting credit is based on the percentile rankings on the sum of its component indicators: the depth of credit information index and the strength of legal rights index

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Legal rights

The data on the legal rights of borrowers and lenders are gathered through a questionnaire administered to financial lawyers and verified through analysis of laws and regulations as well as public sources of information on collateral and bankruptcy laws.

Strength of legal rights index

The strength of legal rights index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending (table 21.7). Two case scenarios, case A and case B, are used to determine the scope of the secured transactions system. The case scenarios involve a secured borrower, the incorporated company ABC, and a secured lender, BizBank.

1.8 Protecting Investors Methodology

Doing Business measures the strength of minority shareholder protections against directors’ misuse of corporate assets for personal gain. The indicators distinguish 3 dimensions of investor protections: transparency of related-party transactions (extent of disclosure index), liability for self-dealing (extent of director liability index) and shareholders’ ability to sue officers and directors for misconduct (ease of shareholder suits index) . The data come from a questionnaire administered to corporate and securities lawyers and are based on securities regulations, company laws, civil procedure codes and court rules of evidence. The ranking on the strength of investor protection index is the simple average of the percentile rankings on its component indicators. To make the data comparable across economies, several assumptions about the business and the transaction are used.

Strength of investor protection index

The strength of investor protection index is the average of the extent of disclosure index, the extent of director liability index and the ease of shareholder suits index. The index ranges from 0 to 10, with higher values indicating more investor protection.

1.9 Paying Taxes Methodology

Doing Business records the taxes and mandatory contributions that a medium-size company must pay in a given year as well as measures of the administrative burden of paying taxes and contributions. The project was developed and implemented in cooperation with PricewaterhouseCoopers (PwC). Taxes and contributions measured include the profit or corporate income tax, social contributions and labor taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and any other small taxes or fees (figure 1).

The ranking on the ease of paying taxes is the simple average of the percentile rankings on its component indicators, with a threshold being applied to one of the component indicators, the total tax rate (figure A.1). The threshold is defined as the highest total tax rate among the top 15% of economies in the ranking on the total tax rate. It is calculated and adjusted on a yearly basis. This year’s threshold is 25.5%. All economies with a total tax rate below this threshold receive the same score as the economy at the threshold. The threshold is not based on any economic theory of an “optimal tax rate” that minimizes distortions or maximizes efficiency in the tax system of an economy overall. Instead, it is mainly empirical in nature, set at the lower end of the distribution of tax rates levied on medium-size enterprises in the manufacturing sector as observed through the paying taxes indicators.

1.10 Trading Across Borders Methodology

Doing Business measures the time and cost (excluding tariffs) associated with exporting and importing a standardized cargo of goods by sea transport. The time and cost necessary to complete every official procedure for exporting and importing the goods are recorded; however, the time and cost for sea transport are not included. All documents needed by the trader to export or import the goods across the border are also recorded. For exporting goods, procedures range from packing the goods into the container at the warehouse to their departure from the port of exit. For importing goods, procedures range from the vessel’s arrival at the port of entry to the cargo’s delivery at the warehouse. For landlocked economies, these include procedures at the inland border post, since the port is located in the transit economy. Payment is made by letter of credit, and the time, cost and documents required for the issuance or advising of a letter of credit are taken into account. The ranking on the ease of trading across borders is the simple average of the percentile rankings on its component indicators.

Local freight forwarders, shipping lines, customs brokers, port officials and banks provide information on required documents and cost as well as the time to complete each procedure. To make the data comparable across economies, several assumptions about the business and the traded goods are used.

1.11 Enforcing Contracts Methodology

Indicators on enforcing contracts measure the efficiency of the judicial system in resolving a commercial dispute. The data are built by following the step-by-step evolution of a commercial sale dispute before local courts. The data are collected through study of the codes of civil procedure and other court regulations as well as questionnaires completed by local litigation lawyers and by judges. The ranking on the ease of enforcing contracts is the simple average of the percentile rankings on its component indicators.

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The name of the relevant court in each economy—the court in the largest business city with jurisdiction over commercial cases worth 200% of income per capita.

1.12 Resolving Insolvency Methodology

Doing Business studies the time, cost and outcome of insolvency proceedings involving domestic entities. The data are derived from questionnaire responses by local insolvency practitioners and verified through a study of laws and regulations as well as public information on bankruptcy systems (figure 1). The ranking on the ease of resolving insolvency is based on the recovery rate (figure A.1).

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The bank wants to recover as much as possible of its loan, as quickly and cheaply as possible. The unsecured creditors will do everything permitted under the applicable laws to avoid a piecemeal sale of the assets. The majority shareholder wants to keep the company operating and under its control. Management wants to keep the company operating and preserve its employees’ jobs. All the parties are local entities or citizens; no foreign parties are involved.

1.13 OBJECTIVES

The main objective of the study is as follows:

The key objective of the study is as follows:

- For any business data there exists a severe variable and below that many sub-variables are present. In order to reduce the independent variable we need to reduce the dimension of the variable by using the techniques of Factor Analysis (FA).
- Among the independent variables; though there are some remedial measures to overcome, the estimates obtained using those models, And then the model is constructed and it can be used for prediction, now the question arises about whether the model is good fit or not. In this study, the authentic techniques can be used as Multiple Linear Regression (MLR).
- And then using the factors scores to assign a rank for each factor and then average it. Then we get a correct sequence of ordered rank for each country. And the techniques which we used here is Ranking.

1.14 SOURCE OF DATA

The data collected is a secondary data obtained from different websites which are listed below:

- http://worldbank.tumblr.com/
- http://www.doingbusiness.org

And the data collected for the year is 2013 to predict the ranking for ease of doing business in a country.

1.15 VARIABLE DESCRIPTION

Data were collected on 40 variables described below. All the variables are continuous in nature

- Starting a business – Procedures, time, cost and minimum capital to open a new business

- Dealing with construction permits – Procedures, time and cost to build a warehouse

- Getting electricity – procedures, time and cost required for a business to obtain a permanent electricity connection for a newly constructed warehouse

- Registering property – Procedures, time and cost to register commercial real estate

- Getting credit – Strength of legal rights index, depth of credit information index

- Protecting investors – Indices on the extent of disclosure, extent of director liability and ease of shareholder suits

- Paying taxes – Number of taxes paid, hours per year spent preparing tax returns and total tax payable as share of gross profit

- Trading across borders – Number of documents, cost and time necessary to export and import

- Enforcing contracts – Procedures, time and cost to enforce a debt contract

- Resolving insolvency – The time, cost and recovery rate (%) under bankruptcy proceeding.

1.16 PROCEDURES

S_pro:

Preregistration (for example name verification or reservation, notarization). Registration In the economy largest business city.

S_time:

Does not include time spent gathering information. Procedure considered completed once final incorporation document is received.

S_cost:

Officials cost only, no bribes no professional fees unless services required by law.

S_pim :

Funds deposited in a bank or with a notary before registration (or within 3 months)

D_Pro:

Submitted all relevant documents and obtaining all necessary clearances, licenses, permits, and certificates. Submitting all required notification and receiving all necessary inspections.

D_time:

Does not include time spent gathering information. No prior contact with officials.

D_cost:

Official costs only, no bribes

GE_Pro:

Obtaining external installation works and possibly purchasing material for these works. Concluding any necessary supply contract and obtaining final supply.

GE_Time :

Is at least one calendar day. Each procedure starts on a separate day. Does not include time spent gathering information

GE_Cost:

Official cost only, no bribes. Value added tax excluded.

R_Pro:

Procedure to legally transfer title on immovable property. Registration Procedures in the economy

largest business city.

R_Time:

Each procedure starts on separate day. Procedure that can be fully completed online or an exception to this role. Procedure considered completed once final document is received.

R_Cost:

Official cost only, no bribes. Value added tax excluded.

GC_Str:

Protection of rights of borrowers and lenders through collateral laws. Protection of secured creditors rights through bankruptcy laws.

GC_Dep:

Scope and accessibility of credit information distributed by public credit registers and private credit bureaus.

GC_Pub:

Number of individuals and firms listed in a public credit registry as percentage of adult population.

GC_Priv:

Number of individuals and firms listed in largest private credit bureau of percentage of adult population.

PI_Ext:

Approval process for related-party transactions. Disclosure requirements in case of related party transactions.

PI_E o d:

Ability of minority shareholders to file a direct or derivative lawsuit. Available legal remedies

PI_E o s:

Access to internal corporate documents. Documents and information available during trail.

PI_S o i:

Simple average of the extent of disclosure, extent or director liability and ease of shareholder suit indices.

PT_Pay:

Total number of taxes and contribution paid including consumption taxes. Method and frequency of filling and payment.

PT_Time:

Collecting information and computing the tax payable. Completing tax return forms, filling with proper agency. Arranging payment or withholding.

PT_T o r:

Profit or corporate income tax. Property and property transfer taxes. Waste collection, vehicle, road and other taxes.

T_Doc:

Bank documents, customs clearance documents, port and terminal handling documents.

T_T t e:

Obtaining all the documents. Inland transport and handling, custom clearance and inspections

T_C t e:

All documentation. Inland transport and handling, custom clearance and inspections, official costs only no bribes

E_Time:

Steps to five and serve the case. Steps for trail and judgments. Steps to enforce the judgment .

E_Cost:

Steps to five and serve the case. Time for trail and obtaining judgment. Time to enforce the judgments

E_Pro:

Average attomey fees, court costs, enforcement costs.

R_Ti:

Measured in calendar year, appeals and request for extension are included.

R_Co:

Measured as percentage of estate value. Court fees, fees of insolvency administrators. Lawyer’s fees, other and related fees.

Res_Out:

Whether business continues operating as a going concern or business assets are sold piecemeal.

Res_Re rate:

Measures the cents in the dollar recovered by creditors. Present value of debt recovered. Depreciation of furniture is taken into account

CHAPTER 2

METHODOLOGY

2.1 Factor Analysis

2.1.1 Introduction

Factor analysis is a statistical method used to describe variability among observed, correlated variables in terms of a potentially lower number of unobserved variables called factors . Factor analysis searches for such joint variations in response to unobserved latent variables. The observed variables are modeled as linear combinations of the potential factors, plus "error" terms. The information gained about the interdependencies between observed variables can be used later to reduce the set of variables in a dataset. Factor analysis originated in psychometrics, and is used in behavioral sciences, social sciences, marketing, product management, operations research, and other applied sciences that deal with large quantities of data.

Factor analysis is related to principal component analysis (PCA), but the two are not identical. Latent variable models, including factor analysis, use regression modeling techniques to test hypotheses producing error terms, while PCA is a descriptive statistical technique

The essential purpose of factor Analysis is to describe the covariance relationship among ‘many’ variables in terms of a ‘few’ underlying, but unobservable, random quantities called factors. The motivation is the following argument:

Suppose variables can be grouped by their correlation such that variable within a group are highly correlated among themselves but have relatively low correlations with variables in a different group. It is conceivable that each group of variables represents a single ‘construct ‘ or ‘factor’ which is responsible for the correlation.

For example, scores in subjects like mathematics, Physics and other may suggest an underlying ‘intelligence’ factor, while the scores in sports and other activities may suggest a physical fitness’ factor. It is these types of structures that factor analysis seeks to confirm.

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