An entrepreneur, Naa, is deciding to expand her business beyond her country. She has two choices – Country A and Country B. Both countries are developing countries but they have two distinct ideas of how to progress and they’re both interested in creating an enabling environment for business.
Country A believes the responsibility of the state is to provide infrastructure and security and to allow the private sector to do the rest.
The business community of Country A love the laissez-faire environment. They build schools with borrowed money and are compelled to charge high fees to recover their investments. Also because only few get access to this expensive education, few people plan to teach in future. Many plan to work in the finance industry. There’s a similar system in health. Due to the high costs of running hospitals, Country A business people generally avoid that sector. They invest in a few medical services for the rich community. The community find it cheaper to fly out and get treatment for complicated procedures anyway, so there’s little investment in the expensive medical equipment or training. What Country A’s business people really invest heavily in is the financial sector. Poor citizens trying to climb the social ladder borrow at a cut-throat rate and this generates huge income for the business sector. They also invest a lot in owning land which they then rent to poor people.
The government of Country A is pleased with its pro-business reputation. It runs very efficiently because there’s really little to do. However, it is unhappy with how much it has to pay for security because of rising crime arising from the high number of young people with no other means of sustenance. It’s also unhappy with the number of protests from people wanting to overthrow it. It believes such people are lazy people unwilling to take advantage of the free market to better their lives.
If Naa invests in Country A, she is sure to keep most of her returns since taxes are very low. However, she’ll have to spend a lot in paying the few people qualified enough to work in her business. She’ll also have to spend a lot in further training them. Healthcare costs for her employees will be very expensive as well. But the worst part for her is that few people would be able to afford what she plans to produce.
Country B believes that apart from infrastructure and security, the government also has to provide education and healthcare.
The business sector accuses the government of being anti-business. They believe they can better manage health and education although they’ve been largely involved in building elite institutions to serve the rich and they depend on teachers and doctors who were trained in government institutions. Of course, they love the finance industry. With little investment in infrastructure they are able to make high returns lending to people.
The government of Country B suffers a lot from a reputation of being anti-business. Its public sector is large and inefficient because of the scale of things it’s engaged in. It argues that providing health and education has allowed a well-educated citizenry which has access to at least basic health facilities and therefore its inefficiency should be pardoned as small in comparison. It also argues that the social mobility created allows it to spend less on security since people believe they can make it in life through education.
If Naa invests in Country B, she will lose about 30% of her returns due to the tax regime of Country B. However, she has no trouble in hiring graduates at a cheap price due to the high number of them in the country. Thanks to health insurance, she will not have to spend much on healthcare for her staff. But most of all, due to the high number of lower middle class people, she will be able to get a decent market for her product.
So which country does Naa choose to invest in? Well she chose the country with the enabling environment. Now you decide which of the environments is enabling.