# **APPENDIX 2** : **INVESTMENT CLIMATE INDICATORS**

# **_Start-up cost index_** :

Data come from the World Bank database “Doing Businesses”. They are based on the work of Djankov, Simeon, Rafael La Porta, Florencio, Lopez-de-Silanes and Andrei Shleifer who measured the start-up costs of a new firm registered legally as a limited liability society and owned by residents in the country. Those costs include the number of procedures one has to undertake to register the business, the time the whole process takes, the minimum capital requirements and, finally, the monetary cost of the registration process. Both the costs of undertaking the process and minimum capital requirements are measured in percentage of GNI per capita.

To construct the start-up cost index we have followed the methodology used in the annual reports of the “Economic Freedom of the World” and the “Human Development Index” among others.<sup>13</sup> . Each component (procedures, time, cost and minimum capital) has been re-scaled to be between 0 and 10. Then an unweighted average has been taken to calculate the overall indicator. There is data for Europe, the US and all ECA countries, with the exceptions of Estonia, Tajikistan and Turkmenistan.<sup>14</sup>

# **_Access to finance_**

The access to finance index is a summary of the following variables: ratio of domestic credit provided by deposit money to GDP (World development Indicators, World bank); interest rate spread and real interest rate (both from the Word Development Indicators, World Bank); ratio of deposit coverage to GDP, which is used by the IMF as a proxy to collateral<sup>15</sup> ; and the World Bank’s measure of creditors’ protection index. The later comes from the World Bank’s Doing Business database. It is an indicator of creditor rights in insolvency, based on the methodology of La Porta and others (1998). The indicator measures four powers of secured lenders in liquidation and reorganization, such as priority access to the proceeds from liquidation. The aggregate creditor rights index sums the total score across all four variables. A minimum score of 0 represents weak creditor rights and the maximum score of four represents strong creditor rights.

Each of those variables has been re-scaled so the best is assigned the number 10 and the worst 0. The overall access to finance index is a simple average of all components.

# **_Exit costs_**

The World Bank’s database “Doing Businesses” is one of the first attempts to measure in a comparable way the exit costs. Members of the International Bar Association's Committee on Insolvency and participating law firms or bankruptcy judges from around the world were sent a questionnaire enquiring about the number of procedures, time and cost of the process, as well as about the preservation of the priority rule to secured creditors and the efficiency of the outcome of the bankruptcy process. The index captures the summary indicator _“Goals of insolvency index”_ which measures whether the insolvency law achieves its goals successfully. The higher the index, the more successful is the system.

> 13 James Gwartney, Robert Lawson and Neil Emerick: Economic Freedom of the World Annual reports. The Fraser Institute, Canada.

> 14 See appendix 1 for country grouping

> 15 Garcia, Gillian (1999): „Deposit insurance: a survey of actual and best practices“ IMF WP/99/54

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