For a country to have a thriving labor market, it must have a strong Business Environment. Business Environment, as defined by the Legatum Institute, is a measure of several factors that include:
- Entrepreneurial Environment
- Business Infrastructure
- Access to Credit
- Investor Protections
- Labour Market Flexibility
Each of these factors influences the performance and sustainability of a nation’s business environment.
These forces are external to the business itself, yet can determine labor market outcomes. Without a strong Business Environment, companies cannot thrive, private sector employment creation ceases to grow, and a nation’s economy can decline.
The stronger a nation’s Business Environment, the more positive the entrepreneurial climate becomes. A positive entrepreneurial climate drives progress. It allows a country and its citizens to pursue new entrepreneurial ideas and business opportunities.
This contributes greatly to significant economic growth, resulting in greater wealth and social well-being.
Business Environment factors defined
Understanding how Business Environment is measured is key to determining its influence on a nation’s labor economy.
Entrepreneurial Environment measures a business’s accessibility to the market economy. A thriving Entrepreneurial Environment means it is easier to start a business. It also makes it easier for individuals to get ahead by working hard.
Business Infrastructure assesses the framework necessary for businesses and individuals to gain market access. Business Infrastructure is dependent on several variables that include transport/logistics performance, the strength of utilities and communication, and the cost of electricity and broadband.
Access to Credit is necessary as it is a strong indicator of perceived affordability of financial services. Access to Credit determines how easy it is for individuals and businesses to obtain affordable credit to finance entrepreneurial ventures. Increased Access of Credit fosters entrepreneurship.
Investor Protections is an assessment of the rules surrounding ownership rights. Investor protection mechanisms are necessary to protect individuals’ and businesses’ assets from misrepresentation. This results in greater investor confidence and helps sustain investor interest in the long term.
Labor Market Flexibility is an important aspect of understanding how businesses adapt to labor market forces. Greater ability to respond to changes in market conditions is central to a business’s overall performance.
Ranking the Strongest Business Environments
While the world’s business climate has increased by more than 10 percent in the last decade, this growth is not proportional. Several countries have failed to improve in the last decade while others have improved significantly.
In the 2018 Legatum Prosperity Index, the nations with the strongest Business Environments were:
- United States
- New Zealand
- United Kingdom
- Hong Kong
The two North American countries, Canada and the United States, have seen a large overall prosperity gain. As a region, North America has the highest score for the Business Environment. Startups and enterprises in these countries can properly utilize business opportunities and tap into useful resources.
Hong Kong, one of three Asia-Pacific countries ranked in the top 10, has seen significant progress in its Business Environment. Considered to be the world’s most open economy, individuals and businesses in Hong Kong experience strong enterprise conditions thanks to low unemployment rates.
Countries in Western Europe, such as the United Kingdom, Finland, Denmark, and Switzerland have introduced regulatory policies to encourage entrepreneurship and incentivize the business climate. This has contributed to improvements in labor market performance in these countries.
All of the countries that rank high in Legatum’s Business Environment share a common characteristic. Each demonstrates an economic model based on an open economy. This encourages entrepreneurial growth and offers minimal barriers to free trade, private ownership, and investor protections.
Countries that inhibit entrepreneurial growth saw a decline in their economy and overall prosperity. Countries unable to weather economic shocks or external forces like Venezuela and Yemen experienced a significant decline in their economy and, to an extent, in their pathway to prosperity.
A Final Note on Business Environment
Legatum’s analysis of a nation’s Business Environment is critical in understanding potential labor market trends and how a labor market will perform. A stronger Business Environment is a good indicator of job expectations, career opportunities, and current employment conditions.
But as a measurement of prosperity, Business Environment is one of nine pillars that the Legatum Institute uses to assess a nation’s overall prosperity score.
To fully understand the strength of a nation and its economic performance, Business Environment must be considered alongside Legatum’s other Index pillars: Economic Quality, Governance, Education, Health, Safety & Security, Personal Freedom, Social Capital, and Natural Environment.
While Business Environment may be the most important factor in determining labor market performance, all of the pillars in Legatum’s Prosperity Index play a role in the social well-being of individuals. This, in turn, can have an aggregating effect on how a business prospers within its market.