Creating a better local business environment (Part 2): What to measure

Make no mistake: economic development is a competition. Local governments need to do whatever they can to create a local business environment that nurtures a competitive business community; one in which local firms successfully compete in local, national and international markets.

In the first post in this series I described the role of local government in supporting local business growth and the importance of a business environment that is conducive to innovation and competitiveness. In this post I examine the ways to assess the local business environment and how to identify the ways local councils can improve it.

Local governments can work with state and federal governments, and the business community, to improve the local business environment. While business development programs and services are useful, these only reach a limited number of firms. In contrast, the local business environment affects all local businesses.

Understanding the issues that affect private investors

There is a wide range of indicators used to assess the businesses environment and to better understand the issues that affect private investors. Most of these focus on national or state-level factors. For example, the World Bank conducts annual Doing Business assessments focuses on 11 business environment topics, which are compared across some 185 countries. In its most recent Doing Business report, better business environments are closely linked to job creation. In addition, the World Economic Forum produces the annual Global Competitiveness Report, which assesses indicators to national competitiveness. There is also the Global Entrepreneurship Monitor, which assesses national levels of entrepreneurship.

Instruments have also been designed to measure regional and local conditions for business. For example, the World Bank applies the Doing Business methodology to sub-national jurisdictions, which include states and major cities. There is also the European Union’s Regional Competitiveness Index and the UK’s Centre for International Competitiveness. In Australia, the Regional Australia Institute has developed a Regional Competitiveness Index, which collects and ranks data on 68 indicators across ten themes.

All these provide valuable insights into the national and sub-national conditions affecting business dynamics, competitiveness and the prospects for growth. However, none provide specific details on the levers local government authorities have at their disposal. They all provide valuable insights, but generally cannot be used to guide efforts to improve the conditions for local business growth among local economies of varying sizes and characteristics.

Furthermore, many of the assessment tools in use rely on data drawn from secondary sources, which is often dated and used alongside other unrelated indicators. For example, the results of a labour force survey will be considered alongside population census data and business count data. Some of this data is collected monthly, some annually and others every four or five years.

Know how local business environments affect investment decisions

The challenge here is to understand how the local business environment affects the behaviour of business and to help councils assess how well they are doing. For example, is it possible to determine that one local government area has a better business environment than another?

There are some initial questions that are useful in this regard:

Does the business environment respond to the needs and opportunities of the local business community? Has council recognised and responded to the issues faced by local business? There may be types of local business community that require attention (e.g., home-based business) or specific sectors (e.g., tourism, manufacturing, agribusiness).
Is local competition and innovation encouraged? Does the local business environment foster competition and innovation? For example, is it easy for new business to start up and compete? Are there barriers to entry, such as a high-cost to obtaining licenses or permits? Are local firms able to innovate and respond to changing market opportunities?
Is the business environment efficient? Do local laws and regulations work? Are they a proportionate response to the problems they seek to address or are they too onerous, cumbersome or costly?
How do local councils and business interact? How does council interact with the local business community and understand the issues? Has council created appropriate mechanisms for doing this?

Local councils must answer these questions and consider where they can make improvements. This requires data.

There are three areas on which data can be obtained using the definition of a local business environment I presented in my first post.

Policies and strategies

These reflect the ambition of council with regard to local economic and business issues. While policies and strategies are generally statements of intent, as opposed to instruments that regulate or control business activity, they reflect a council’s understanding of business concerns and opportunities.

A good starting point is to map these policies and strategies. Similarly, it may be useful to map the local entrepreneurship ‘ecosystem’ to identify the range of policies, programs, services and facilities that are available to the local business community. This goes beyond those provided by council and can help to establish council’s engagement in the business sector.

Laws and regulations

These are used to govern the business sector and directly affect the behaviour of local businesses. In the 2011 Productivity Commission survey of businesses around Australia regarding their experiences with local government regulation. Of the major concerns identified were:

  • Complex regulatory frameworks;
  • Overlaps and inconsistencies in requirements;
  • Uncertain and protracted timeframes;
  • Lost business opportunities, including preventing a business from opening;
  • Insufficient transparency in reporting requirements;
  • Regulatory creep;
  • Inadequate resourcing of local governments;
  • Unreasonable payments such as through rates or extra fees and contributions; and
  • The perception that local governments put a low priority on minimising business costs.

Thus, there are many legal and regulatory challenges for local government and scope for improvement.

Indeed, the Australian Taskforce on Reducing Regulatory Burdens on Business in 2006 identified five features of regulations in Australia that contribute to compliance burdens on business that are not justified by the intent of the regulation:

  1. Excessive coverage, including ‘regulatory creep’;
  2. Regulation that is redundant;
  3. Excessive reporting or recording requirements;
  4. Variation in definitions and reporting requirements; and
  5. Inconsistent and overlapping regulatory requirements.

It is important to assess the effectiveness and quality of local regulation. This includes the stock of existing regulations as well as the flow of new local laws and regulations that council introduces. Regulations can easily become out-of-date and accumulate to create unnecessary burdens on business. Councils should understand how these affect investment decisions and what impact they have across the whole economy.

Institutional arrangements

This is concerned with the way in which council interacts with the business community and understands and responds to their concerns. Typically, councils do this on an ad hoc basis. Aggrieved businesses complain to council or council members visit or observe local business associations. However, this is not enough. It is important to ensure dialogue with the business community is well organised and planned, and that it extends beyond the usual well-connected individuals. There are tools for assessing the quality and impact of public-private dialogue.

Councils can also create partnerships with the local business community and can engage a range of private, public, academic, research, and civil society organisations to facilitate the flow of information that can be used by business to become more competitive. The development of local industry clusters is a good example of this.

Planning regimes and the business environment

Within the Australian local government context, the role of local government in planning and zoning presents one of the major challenges to creating a business environment that is conducive to innovation and competitiveness.

The Productivity Commission 2011 review of business regulation in Australia found that the planning and zoning systems involve a ‘complex interweaving of citizen, business, and government regulatory relationships’. Moreover, the regulations associated with planning, zoning and development assessments constitute one of the most complex regulatory regimes operating in Australia’.

The Commission found that land use planning, including zoning, affects competition by restricting business entry and allowing businesses to constrain the activities of their competitors. While planning restrictions are generally aimed at improving amenity for the community, they also limit the number, size, operating model, and product mix of businesses. This restricts competition. For example, prescriptive zones and complex use conditions such as floor space limits inhibit business entry, while highly prescriptive descriptions of businesses allowed in particular zones limit innovation.

Councils often give consideration to the impacts of proposed developments on the viability of existing businesses or centres, rather than on the economy-wide benefits. Thus, while there may be benefits in preserving the character of certain centres, restrictions aimed at protecting existing businesses are unnecessary and unjustifiably restrict competition.

Good business environments require good laws and regulations. This does not require the removal or undermining of regulations or land use plans. Instead, it requires regulations and zones that are fit-for-purpose and responsive to business dynamics, while ensuring the protection of key assets (e.g., residents, consumers, the environment).

Local governance reform and innovation

In my third and final post in this series, I look at how local councils can adopt new approaches to the governance and development of the business sector. The current transformations in how business is being done (e.g., new business models, new products and services), the role of private investment and the challenges of inclusive economic growth require local governments to think differently and work more closely with a variety of other actors to create a more vibrant, competitive and inclusive local economy.

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