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Starting a Business in Europe: Part 2

Economic Conditions and the Business Environment in Europe: What Country and City Should You Choose?

By Volker Poelzl
10/12/2010

Starting a Business in Europe - Top Countries and Cities

How Easy is it to Set Up a Business?

There are a number of surveys by large international organizations such as the World Bank that regularly evaluate the business-friendly economic environment of countries worldwide. The World Bank’s Ease of Doing Business Index project provides objective measures of business regulations and their enforcement across 183 economies and selected cities around the world. The report includes several criteria important for doing business, such as starting a business, dealing with construction, employing workers, registering property, getting credit, paying taxes, trading across borders, enforcing contracts, etc.

According to World Bank report, the highest ranked European countries are:

  • UK (#5)
  • Denmark (#6)
  • Ireland (#7)
  • Norway (#10)

Europe’s other large economies are ranked quite a bit lower:

  • Switzerland (#21)
  • Germany (#25)
  • Netherlands (#30)
  • France (#31)
  • Spain (#62)
  • Italy (#78)

How Competitive is the Business Environment?

Another frequently used indicator is the Global Competitiveness Report, published annually by the World Economic Forum. According to its own definition, the Global Competitiveness Report “identifies impediments to growth and thereby helps stimulate the development of relevant strategies to achieve sustained economic progress…It is the most comprehensive and authoritative assessment of the comparative strengths and weaknesses of national economies, used by governments, academics and business leaders.” Since the report is published annually it correctly reflects the current economic environment in Europe affected by the global economic downturn, which makes it a very useful tool to assess the economic conditions in the country of your interest. Of the top ten countries discussed in the report, six are from Europe: Switzerland (#1), Sweden (#4), Denmark (#5), Finland (#6), Germany (#7), and Netherlands (#10). Although European countries generally rank high in this report, not all countries are able to maintain their positions from one year to the next. For example, due to its weak financial markets the United Kingdom dropped one rank to 13th. It is also notable that Switzerland overtook the U.S.A. as number one over the past year, mostly due to the fact that the Swiss economy remained very stable during the global financial crisis, whereas the United States was several affected by the downturn. The report’s Country Profile Highlights provides a summary of the strong qualities of each country’s economy. Sweden, Finland, and Denmark, for example, are all ranked among the top 15 countries with regard to macroeconomic stability with healthy budget surpluses and low levels of public indebtedness. Germany, on the other hand, is ranked 1st for the quality of its infrastructure, especially transportation and communications. France is also lauded for its excellent infrastructure (ranked 3rd in the world) especially in regard to transportation, communications, and energy.

Economic Freedom

The Index of Economic Freedom is a series of 10 economic measurements published annually by The Heritage Foundation and The Wall Street Journal. The index states that “the highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself.” Based on this definition from which it derives its ten major criteria (i.e. business freedom, trade freedom, monetary freedom, property rights, etc.), the report ranks 179 countries worldwide. Surprisingly, the highest ranked European country is Ireland (#5), followed by Switzerland (#6), and Denmark (#9), the only European countries among the top ten.

Corruption, Cronyism, Organized Crime, and other Woes

Corruption is an inherent part of doing business in a number of European countries, especially in Eastern and Southern Europe. Italy is famous for the Mafia, whose illicit activities permeate all layers of society, including politics and business. Corruption is such a big part of Italian life that the U.S. Commercial Service does not consider Italy an attractive place for American businesses. But with the exception of Italy and Greece, most other European countries have either a very low or moderate level of corruption, which does not significantly interfere with conducting a successful business.

Transparency International’s Corruption Perceptions Index (CPI), an annually published survey of corruption worldwide, is a useful tool to determine how much corruption affects the daily life, politics, and economy in 180 countries worldwide. The Corruption Perceptions Index (CPI) is a "survey of surveys", based on 13 different expert and business surveys.

The 2009 ranking shows that Scandinavian and Central European countries have very low corruption, among them:

  • Denmark (#2)
  • Sweden (#3)
  • Finland (#6)
  • Switzerland (#5)
  • Netherlands (#6)
  • Iceland (#8)
  • Norway (#11)
  • Germany(#14)
  • Ireland, (#14)
  • Austria(#16)
  • UK (#17)

In southern European countries on the other hand, corruption is much more wide-spread, such as in:

  • Spain (#32)
  • Portugal (#35)
  • Italy #63)

Eastern and Southeastern European countries also rank fairly low, with Greece Romania, and Bulgaria having the highest perceived corruption in the entire European Union:

  • Greece (#71)
  • Romania (#71)
  • Bulgaria (#71)
  • Croatia (#66)
  • Slovakia (#56)
  • Latvia (#56)
  • Czech Republic (#52)
  • Lithuania (#52)
  • Poland (#49)
  • Hungary (#46)
  • Slovenia (#27)
  • Estonia (#27)

It is also interesting to note that the former Soviet Republics in Eastern Europe have one of the highest corruption indices in the world:

  • Russia (#146)
  • Ukraine (#146)
  • Belarus (#139)
Europe’s Leading Business Cities

Cushman & Wakefield, a privately held commercial real estate services firm, publishes the European Cities Monitor, an annual survey of Europe’s major business centers, based on data and assessments from 500 leading European companies. The survey focuses on the main topics of :best for business” and the “best city in which to locate a business today,” but the survey also includes a number of other criteria such as quality of life, telecommunications, access to markets, availability and quality of staff, cost of office space and transportation. London has maintained its first position ever since the beginning of the survey in 1990. Here are the top ten leading business cities cited:

  • London (#1)
  • Paris (#2)
  • Frankfurt (#3)
  • Barcelona (#4)
  • Brussels (#5)
  • Madrid (#6)
  • Munich (#7)
  • Amsterdam (#8)
  • Berlin (#9)
  • Milan (#10)

It is notable that Prague and Warsaw have consistently climbed the ranking since joining the EU and in the last survey they reached 21st and 23rd places respectively. According to Cushman & Wakefield, Warsaw can expect the biggest influx of companies in the next five years, replacing Moscow in popularity. But it is not only the overall ranking that is important, but also the individual categories that are part of it. Warsaw ranks high among European capitals in terms of cost of qualified staff, low cost and availability of office space, and a positive business climate created by the government. London, on the other hand, although still ranked as Europe’s number one business city by the European Cities Monitor, ranks low on the cost of staff, the cost of office space and levels of pollution.

Small Businesses vs. Startup Businesses in Europe

But keep in mind that what makes London, Paris, and Frankfurt attractive for Europe’s leading businesses may not necessarily be as important for small businesses or start-ups. It is very important to determine the needs of your business or business start-up before putting your faith in any of the surveys and studies mentioned in this article.

For more information about individual countries, visit the website of the U.S. Commercial Service, where you will find individual country sections that also offer Country Commercial Guides, with detailed information about the business and investment climate in each European country. These guides are an invaluable resource for anyone interested in opening a business abroad and include a detailed market overview, as well as detailed information about market challenges, market opportunities, and market entry strategies.

If you need further country analysis and information and don’t mind paying for it, check out the website of the Economist Intelligence Unit (EIU). The EIU is a research and advisory company providing country, industry, and management analysis worldwide. It provides monthly country reports, 5-year country economic forecasts, country risk service reports, and industry reports. EIU also provides in-depth research for businesses that require analysis of particular markets or business sectors.

Part 1 of this column discusses "Starting a Business in Europe: Financial, Legal, and Visa Requirements for Setting Up a Business in Europe"

He has traveled in over thirty countries worldwide and has lived in ten of them for study, research and work.