Business Climate in Korea Gets World Bank Grades

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Business Climate in Korea Gets World Bank Grades

 

September 21, 2004


Korea has one of the most favorable business climates in Northeast Asia and among member countries of the Organization of Economic Co-operation and Development, according to a report from the World Bank.

The report, "Doing Business in 2005: Removing Obstacles to Growth," released September 8 benchmarks regulatory standards and reforms in 145 nations, and identifies specific regulations and policies that encourage or discourage investment, productivity and growth. The key indicators used to measure the ease or difficulty of operating a business include start-up procedures, hiring and firing workers, registering property, establishing credit, protecting investors, enforcing contracts and closing a business.

The report found that the conditions on most counts are better in Korea than the regional and OECD average, except for laws designed to expand access to credit. The challenges of starting a business were broken down into procedures required establishing a business, the associated time and cost, and the minimum capital requirement.

The report, co-sponsored by the World Bank and the International Finance Corporation, the private sector lending arm of the World Bank Group, finds that entrepreneurs can expect to go through 12 steps requiring 22 days on average to start a business, at a cost equal to 17.7 percent of per capita gross national income. Korea's per capita GNI is about $12,000.

"They must deposit at least 33.2 percent of GNI per capita in a bank to obtain a business registration number, compared with the regional average of 44.1 percent of GNI and the OECD average of 44.1 percent of GNI," the report says.

The difficulties that employers in Korea face are shown in three indices of how difficult it is to hire a new worker, how rigid the regulations are on working hours and how difficult it is to implement layoffs. Conditions covered by the indices include the availability of part-time and fixed-term contracts, working hour requirements, minimum wage laws and minimum conditions of employment. Each index assigns values between zero and 100, with higher values representing more rigid standards. The overall Rigidity of Employment Index is an average of the three indices. For Korea, the overall index is 34, compared with both the regional and OECD averages of 34.4.

The ease with which businesses can secure rights to property was measured using the number of steps necessary to transfer a property title from a seller to the buyer, and the time and costs as a percentage of the property value. In Korea, it takes 11 days to register property, compared with the regional and OECD averages of 34.

For credit information sharing and the legal rights of borrowers and lenders, one set of indicators measures the coverage, scope, quality and accessibility of credit information available through public and private registries. A second set measures how well collateral and bankruptcy laws facilitate lending. The scale ranges from zero-10, with higher scores suggesting the laws are better designed to expand access to credit. Korea scored six, compared with the regional and OECD averages of 6.3.

The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. The index ranges from zero to six, with higher values indicating that more credit information is available from a public registry or private bureau. Korea scored five and was on par with the regional and OECD averages of five.

The Disclosure Index measures the degree to which investors are protected through disclosure of ownership and financial information. It encompasses seven ways of enhancing disclosure - information on family ownership, indirect ownership, beneficial ownership, voting agreements between shareholders, audit committees reporting to the board of directors, use of external auditors, and public availability of ownership and financial information to current and potential investors. The index varies between zero and seven, with higher values indicating greater disclosure. Korea scored six, compared with the regional and OECD scores of 5.6.

The ease or difficulty of enforcing commercial contracts in Korea is measured using three indicators - the number of procedures counted from the moment a plaintiff files a lawsuit until payment, the associated time, and the cost (in court and attorney fees) expressed as a percentage of debt value. In Korea, the cost of enforcing contracts is 5.4, compared with the regional and OECD averages of 10.8.

The recovery rate measures the efficiency of foreclosure or bankruptcy procedures, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm. The recovery rate in Korea is 81.1, compared with the regional and OECD averages of 72.1.

 

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