The reasoning above applies not only to a foreign multinational firm, but also to a
local business or skills acquisition by an individual. If he or she decides to acquire
some specific skills, C includes the cost of schooling, (1) as direct expenditure, and
(2) as opportunity costs – no salary earned while attending school. The benefit B is
the present discounted value of the increase in wages arising after acquiring the
additional skills.
There may be variations in C and B around the world because the government
policies and institutions are different. Figure 1.2 showed that infrastructure, far from
being technical only – included many other elements which could help to maximise
the difference B – C, in order to encourage investment.
It is presently judicious to explore this path.
2.3.2 Determinants of Cost
Once the business idea is born, setting up involves several steps, each of which
requires interacting with another party. Sometimes, the other party has the ability to
“hold up” the process, delays may occur or cost increases. Any of the steps above
(inspection/survey by officials, business permit, obtaining electricity, etc) offers a
chance for a dishonest bureaucrat to request a bribe or for the government to impose
a licensing fee. All of these increase the cost, to say nothing of delays.
To make matters worse, imagine the last bureaucrat in the line requesting a bribe
equal to B (or slightly smaller)? If he feels he has no other choice at this stage, the
rational manager may pay the bribe rather than cancel the project. Previously paid
fees and bribes are “sunk costs” and do not intervene in the decision of whether the
next fee should be paid.
However, it is likely that this scenario has been considered at the outset, if the
manager has done his homework. In cases like this, the rational manager, at this ex
ante point, decides not to invest at all.
Who loses? The business man who will decide to invest in another country
providing a dynamic business environment, offering investment opportunities with
a minimum of “red tape” or the country where no investment occurs, precisely
because of all the “extra” costs involved. There are many stories about countries
where foreigners find it too difficult or lengthy to invest!
Shleifer and Vishny (1993, pp. 615–16) mention that foreigners do not invest in
Russia because too many bribes are involved in the investment application process.
De Soto (1989) describes how his group of researchers purposely set up a small
garment factory in Lima, Peru, to determine how much a small entrepreneur starting
a business needed to meet the official requirements. Overall, the researchers found
that 289 person-days were needed to comply with the official requirements, the cost
of which amounted to the equivalent of 32 times the monthly minimum living wage.
2.3 Investing in a Business
41
local business or skills acquisition by an individual. If he or she decides to acquire
some specific skills, C includes the cost of schooling, (1) as direct expenditure, and
(2) as opportunity costs – no salary earned while attending school. The benefit B is
the present discounted value of the increase in wages arising after acquiring the
additional skills.
There may be variations in C and B around the world because the government
policies and institutions are different. Figure 1.2 showed that infrastructure, far from
being technical only – included many other elements which could help to maximise
the difference B – C, in order to encourage investment.
It is presently judicious to explore this path.
2.3.2 Determinants of Cost
Once the business idea is born, setting up involves several steps, each of which
requires interacting with another party. Sometimes, the other party has the ability to
“hold up” the process, delays may occur or cost increases. Any of the steps above
(inspection/survey by officials, business permit, obtaining electricity, etc) offers a
chance for a dishonest bureaucrat to request a bribe or for the government to impose
a licensing fee. All of these increase the cost, to say nothing of delays.
To make matters worse, imagine the last bureaucrat in the line requesting a bribe
equal to B (or slightly smaller)? If he feels he has no other choice at this stage, the
rational manager may pay the bribe rather than cancel the project. Previously paid
fees and bribes are “sunk costs” and do not intervene in the decision of whether the
next fee should be paid.
However, it is likely that this scenario has been considered at the outset, if the
manager has done his homework. In cases like this, the rational manager, at this ex
ante point, decides not to invest at all.
Who loses? The business man who will decide to invest in another country
providing a dynamic business environment, offering investment opportunities with
a minimum of “red tape” or the country where no investment occurs, precisely
because of all the “extra” costs involved. There are many stories about countries
where foreigners find it too difficult or lengthy to invest!
Shleifer and Vishny (1993, pp. 615–16) mention that foreigners do not invest in
Russia because too many bribes are involved in the investment application process.
De Soto (1989) describes how his group of researchers purposely set up a small
garment factory in Lima, Peru, to determine how much a small entrepreneur starting
a business needed to meet the official requirements. Overall, the researchers found
that 289 person-days were needed to comply with the official requirements, the cost
of which amounted to the equivalent of 32 times the monthly minimum living wage.
2.3 Investing in a Business
41