Both the US and UK have slipped in the global business environment ranking forecast for 2006 - 2010. Despite the recent cartoon controversy with the Islamic world, Denmark looks set to retain the world's top ranking.

28 March 2006

AMSTERDAM — Both the US and UK have slipped in the new Economist Intelligence Unit's global business environment ranking. Despite the recent cartoon controversy with the Islamic world, Denmark looks set to retain the world's best business environment over the next five years.

Although the UK has slipped from a ranking several years ago of 2 to 7th place for the newly released EIU rankings for 2006-2010, the country remains one of the world's most open destinations to foreign investors.

"The attractiveness of the UK's business environment is threatened by sizeable macroeconomic imbalances, an increasingly complex and burdensome tax system, weak productivity, and a sub-standard transport infrastructure," said Philip Whyte, the EIU's Senior Economist for Western Europe,

And the UK will struggle to close its productivity gap not only with the US, but also European countries such as France, reports the EIU, which pins the UK's short-fall to skills deficiencies, both at managerial and lower levels, tight planning restrictions, which inhibit competition, and the country's comparatively low spending on research and development (R&D).

The US, which was previously ranked 5th best in the world from 2001-2005, is now ranked at 8. Although the US investment climate will continue to benefit from major strengths such as good market opportunities, a deregulated labour market and developed infrastructure, a host of weaknesses have led to the lower ranking, says the EIU.

The secret of Denmark's success

Denmark seems to have struck a successful balance between the state and market according to the EIU. Product markets operate efficiently and labour markets are flexible; with low non-wage labour costs and few restrictions on hiring and firing.

"Denmark's top rank appears to belie the claim that globalisation is forcing countries to engage in a 'race to the bottom' by slashing taxes. Companies' investment decisions are motivated by more than tax differentials. Furthermore, Denmark compensates for its high tax burden with the quality of its public goods, notably infrastructure and higher education," reports the EIU.

Euro zone: the cradle of the best and of the worst

Although Euro zone countries include some of the best business locations in the developed world such as Finland and Ireland, they also count for some of the worst, such as Greece and Italy.

"Although the recent outbreak of 'economic nationalism', especially in France, is not expected to lead to a descent into lasting protectionism or arrest FDI flows, the pace of structural reform in the big three euro zone countries - Germany, France and especially Italy - will remain well behind the best-rated countries," reports the EIU.

Eastern Europe on the rise

The EUI rankings show that Eastern European countries are expected to record significant improvements in their business environment over the next five years, with Estonia leading this group with a ranking of 20.

Improvements in much of the region usually escalate during the EU accession process. This incentive to reform, however, becomes blunted after a country becomes a member, says the EIU. For instance this resistance to reform is now strong in the EU's largest new member state, Poland, which is ranked only at 37.

China and India rank surprisingly low

East Asia will on average remain the most attractive region for investment among emerging market regions, but, despite all the current focus on China and India, the business environment ranks for these two countries remain modest. This is consistent with the fact that foreign direct investment (FDI) to these two countries - especially to India - is well below potential.

Globalisation will remain on track

According to the EUI, average world GDP growth in 2006-2010 will slow from the 2005 peak, but remain high by historic standards. Progress in further international trade liberalisation will be slow. Nevertheless foreign trade and exchange regimes will be freer than at any time since the early part of the 20th century.

"The global trend for liberalisation and deregulation will continue to be underpinned by powerful factors such as regional integration, increasing competitive pressures on multinational corporations and competition among countries for foreign investment," reports the EIU.

However, on a positive note, "The quality of infrastructure, especially in ICT, and of financial systems will improve in most countries.  Reform of labour and product markets, even if frequently halting and subject to strong opposition, will continue."

Top ten ranking business environments (2006-2010)

1. Denmark  
2. Finland  
3. Canada  
4. Singapore 
5. Netherlands 
6. Ireland  
7. UK  
8. USA  
9. Switzerland 
10.Hong Kong

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