2016 Index of Economic Freedom

Business Freedom

Business freedom is an overall indicator of the efficiency of government regulation of business. The quantitative score is derived from an array of measurements of the difficulty of starting, operating, and closing a business. The business freedom score for each country is a number between 0 and 100, with 100 equaling the freest business environment. The score is based on 10 factors, all weighted equally, using data from the World Bank’s Doing Business study:

  • Starting a business—procedures (number);
  • Starting a business—time (days);
  • Starting a business—cost (% of income per capita);
  • Starting a business—minimum capital (% of income per capita);
  • Obtaining a license—procedures (number);1
  • Obtaining a license—time (days);
  • Obtaining a license—cost (% of income per capita);
  • Closing a business—time (years);
  • Closing a business—cost (% of estate); and
  • Closing a business—recovery rate (cents on the dollar).2

Each of these raw factors is converted to a scale of 0 to 100, after which the average of the converted values is computed. The result represents the country’s business freedom score. For example, even if a country requires the highest number of procedures for starting a business, which yields a score of zero in that factor, it could still receive a score as high as 90 based on scores in the other nine factors. Canada, for instance, receives scores of 100 in nine of these 10 factors, but the 14 licensing procedures required by the government equate to a score of 64.5 for that factor.

Each factor is converted to a scale of 0 to 100 using the following equation:

Factor Scorei = 50 factoraverage/factori

which is based on the ratio of the country data for each factor relative to the world average, multiplied by 50. For example, on average worldwide, it takes 18 procedures to get necessary licenses. Canada’s 14 licensing procedures are a factor value better than the average, resulting in a ratio of 1.29. That ratio multiplied by 50 equals the final factor score of 64.5.

For the six countries that are not covered by the World Bank’s Doing Business report, business freedom is scored by analyzing business regulations based on qualitative information from reliable and internationally recognized sources.3

Sources. Unless otherwise noted, the Index relies on the following sources in determining business freedom scores, in order of priority: World Bank, Doing Business 2013; Economist Intelligence Unit, Country Commerce, 2009–2012; U.S. Department of Commerce, Country Commercial Guide, 2009–2012; and official government publications of each country.

1 Obtaining a license indicates necessary procedures, time, and cost in getting construction permits.

2 The recovery rate is a function of time and cost. However, the business freedom component uses all three subvariables to emphasize closing a business, starting a business, and dealing with licenses equally.

3 The six countries that are not covered by the World Bank’s Doing Business study are Burma, Cuba, North Korea, Libya, Macau, and Turkmenistan. The methodology for business freedom dates from the 2006 Index because of the limited availability of quantitative data before that date. For the 1995 through 2005 editions, we used a subjective assessment with a score of 1–5. Those earlier scores have been converted by means of a simple formula to make them comparable. Top scores were converted to 100, the next best to 85, and so on. This conversion formula is different from the one used for other subjective factors, but it is unique because those other factors are not bridging to a new, datadriven methodology.

Heritage Media Contacts

  • Justin Posey
    • Communications Manager, Institute for Economic Freedom and Opportunity
    • work: 202.608.6175
    • cell: 202.230.6690
  • Jim Weidman
    • Director, Editorial Services
    • work: 202.608.6145

Heritage Research Contacts

  • Anthony Kim and Tori Whiting

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