and Venables, 1999; Javorcik, 2004). It should be borne in mind that a significant portion of FDI flows to large multinational corporations. These companies are less likely to take an interest in the DBIs, since the DBIs specifically focus on SMEs which may face different regulatory hurdles than large companies. For example, large companies often have a legal team in place that can readily deal with legal issues, such as incorporation of subsidiaries or court representation to enforce contracts – SMEs would have to hire lawyers and the associated expenses can be considerable. Larger companies will thus be more interested in a sister-project to the DB reports, the World Banks Group’s ‘Indicators of Foreign Direct Investment Regulation.’ <mark>However, SMEs still play an important role in attracting FDI, in particular through joint ventures (Fujita 1994). Improving the investment climate can thus open opportunities for new business initiatives, as well as portfolio investment into existing companies expanding their operations. In this light, the DBIs constitute an important source of information on business opportunities to international investors, potentially resulting in more foreign investment and accelerated growth.</mark> Secondly, the DB studies can be used as reform benchmarks that the incumbent government’s performance can be evaluated against. Since the DBI’s more or less objectively measure the regulatory environment, governments can legitimately claim credit for an improvement on individual DB components.<sup>3</sup> The DBIs are thus popular amongst development partners and are frequently used as benchmarks for financial aid, such as the International Monetary Fund’s Extended Credit Facility or the European Union’s General Budget support. But, perhaps more importantly, the DB ranking can also underpin electoral promises which may eventually help governments at the polls – and, conversely, these objective benchmarks may force governments to make structural reforms if there is popular demand for improving the investment climate. The DB ranking can thus serve both as a carrot and stick for driving the regulatory reform process.

The DBs rankings are well publicized and are of interest to international investors, donors, and voters alike. They signal a government’s resolve to improve opportunities for business at home. If visibility is the goal, governments should focus on reforms that will give them the largest gains on their overall ranking.<sup>4</sup>

**Impact** , on the other hand, refers to the effect of DB-related reform on economic performance. This can be linked to visibility to the extent that visible improvements in the business environment can lead to a larger volume of FDI inflows which can eventually stimulate the economy. But more broadly, impact refers to a direct link between the DBIs and economic growth. The difference between maximizing visibility and maximizing impact is that the goal for the former is the highest possible absolute improvement on the DB ranking; for the latter it is to improve indicators irrespective of the absolute improvement but with the highest potential for enhancing economic activity.

There are two ways of identifying reforms that maximize impact. A more indirect way is to survey perspectives of the business community on what they identify as key constraints to doing business. The DBIs are ‘neutral’ in that they aim to objectively compare the quality of regulatory systems across countries. Accordingly, they do not weight particular areas of the business environment according to priorities. Indeed, such priorities are bound to vary across countries. For example, a country that does

> 3 Claiming credit for improvements in overall rankings can be more controversial as such rankings are relative and thus strongly influenced by reforms in other countries.

> 4 The DB website offers a _DBI Reform Simulator_ which can be used to calculate the effect of reforms in particular areas on a country’s DBI ranking: http://www.doingbusiness.org/reforms/reform-simulator.

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