Section III outlines the technical methodologies and desk research used to construct the Regulatory Climate Index. The following pages highlight the Technical Appendix, which describes the Index construction in detail, the rankings for all five areas of business regulation, and detailed city data for each procedure in all five areas of business regulation.
The overall index ranking is based on five areas of regulation for starting and operating a business across U.S. cities: Starting a Business, Dealing with Construction Permits, Registering Properties, Paying Taxes, and Enforcing Contracts. The regulatory burden of each area is measured by a combination of the required procedures, time, and costs for a small- and medium-sized enterprise to comply with the local government requirements. The Index ranks these 10 cities from 1 to 10, where 1 represents the city with lowest regulatory burden.
The Index adopts the analytical framework that is jointly developed by the World Bank and the International Finance Corporation (IFC) to measure and to rank the regulatory areas in the life cycle of a local small-to-medium-sized business. The World Bank and the IFC use the framework to compare the regulatory burden of doing business across 189 countries in its Doing Business 2014 (global report) and across cities within a country (subnational report). In its global reports, the World Bank and the IFC include 10 areas of regulation to compare the differences across countries. Federal regulations that are mandatory for all businesses across cities within a country are omitted in subnational reports. For example, Doing Business in Italy 2013 compared 5 areas of regulations (Starting a Business, Dealing with Construction Permits, Registering Property, Paying Taxes, and Enforcing Contracts) in 13 cities and 7 ports in Italy. Similarly, Doing Business in Mexico 2012 compared 4 areas of regulations (Starting a Business, Dealing with Construction Permits, Registering Property, and Enforcing Contracts) across 31 Mexican states and Mexico City.
Definitions and Assumptions of Areas of Regulation
The 2014 Regulatory Climate Index assesses 5 areas of regulation across 10 cities in the United States. The assumptions of a typical company’s size and financials are based on the U.S. Small Business Administration (SBA) classifications and actual data published by the U.S. Census Bureau and industry publications.
- Starting a Business: Required procedures, time, and costs for entrepreneurs to obtain all necessary licenses and permits from the city offices to start and to formally operate a domestically owned professional services firm. The business entity is a limited liability company (LLC) with more than one owner that provides professional services, such as information technology (IT) services. By the first year of operation, the LLC generates $4 million annual revenues and has 20 employees. The LLC is not qualified for any special economic assistance.
- Dealing with Construction Permits: Required procedures, time, and costs for a con- struction company to obtain all necessary permits from relevant city offices to build a small commercial building. The building project is a new 3-story, 15,000-square-foot commercial office and construction costs are $3 million. The commercial building is not located in any special economic zone; does not need additional special permits, such as historical zone and wetlands; and is free from environmental issues.
- Registering Property: Required procedures, time, and costs for all necessary documents for a business entity to buy a commercial building and to transfer the property title to the buyer’s name. The office building has a value of $4 million. The office building is not located in a special economic zone, and the building does not have any special regulatory requirements.
- Paying Taxes: Required dollar amounts and number of tax payments per year for mandatory business and employment taxes paid to local governments. The business entity is a professional services firm that has $4 million annual revenues and 20 employees (half are singles and half are married). Profits are 15% and the labor share is 20%.
- Enforcing Contracts: Required procedures, time, and costs to comply with the court rules to resolve a commercial dispute between two business entities. The value of the dispute is $1 million and the two business entities are located in the same city of the dispute. Professional fees for lawyers, experts, and other non-mandatory procedures by the court are excluded.
- A procedure is defined as any interaction between business owners and a government agency office to complete a mandatory requirement. Interactions within the business are not counted as procedures. Interactions within government agencies are also not counted as procedures. Interactions between the business and a third party on the behalf of the business are not counted as procedures. Any interaction by the third party on the behalf of the business is counted as a single procedure. Industry-specific procedures are excluded.
- Time is the number of days, including waiting time, that are required to complete a mandatory procedure, counted in business days. Each procedure is counted at least as one business day. Time to process each procedure, including waiting time, is counted as additional business days. A procedure is completed once the company has received the final document or notification. Where there is an option to expedite, the assumption is the company will choose the fastest option.
- Costs, measured in U.S. dollars, include administrative fees paid to the governmental offices. Only fees for legal and professional services that are required by law are included in the calculations. Any costs and fees associated with optional third parties are not included.
- Taxes (Paying Taxes only) represent the tax amounts and the number of tax payments per year that are required by local governments. Taxes paid to the government include corporate income tax, employment tax, operating tax, and license tax.
The Benchmark Ranking is the simple average of ranking of all five areas of business regulation in each city. Each of the five areas of business regulation is, again, the simple average of the normalized values of procedures, time, and costs. Each component in an area of business regulation is ranked relative to the other nine cities. The Index adopts the World Bank’s methodology of Business Distance to Frontier in its Doing Business report.
The calculation of the Benchmark Ranking involves four steps:
Step 1. Normalize each component in each of the five areas of business regulation against the city with the lowest burden to fulfill the regulatory requirement for that particular component. The formula to normalize each component is as follows.
Maximum is the highest value of the component, Minimum is the lowest value of the component, and Individual Performance is the value of the individual city. For example, it takes 5 days (Individual Performance) in Boston to start a business, 4 days in St. Louis (Minimum), and 32 days in Chicago (Maximum). The normalized value of “time” component of “Starting a Business” in Boston is 96.4 [100 x (32 – 5) / (32 – 4)].
Step 2. Calculate the score of each of the five areas of business regulation for each city. The value of an area of business regulation is the simple average of the normalized values of procedures, time, and costs of business regulation in each city. For example, the normalized value of Starting a Business in Boston is 75.4 [(96.4 + 66.7 + 63.5) / 3]. The calculation is the simple average of three normalized values of procedures (66.7), time (96.4), and costs (63.2) in Starting a Business in Boston.
Step 3. Calculate the score of business regulation in each city. The value of business regulation in each city is the simple average of five areas of business regulation of the city. For example, the business regulation value for Boston is 73.3. The calculation is the simple average of five normalized values of Starting a Business (75.4), Dealing with Construction Permits (86.0), Registering Property (74.0), Paying Taxes (49.9), and Enforcing Contracts in Boston (81.1).
Step 4. Rank the scores of business regulation of 10 cities. Boston is ranked third among 10 cities. The lower the number, the less of a regulatory burden in that city.
The Regulatory Climate Index is based on local laws and regulations in each city. Information and values of procedures, time, and costs are collected mainly from official publications on local government websites that are available to the public. Our desk research results are then verified with phone calls and interviews with local city officials and experts for the common practice in each city. Local experts are referred by the trade associations and local chambers of commerce.