Best Markets for Business Access to Capital
The Capital Access Index ranks countries around the world in terms of the financial infrastructures that support entrepreneurial activity by providing access to capital. The index is unique in the breadth of economic factors and financial instruments that are analyzed and its reliance on quantitative, not qualitative, data.
We look at such factors as macroeconomic environments, financial and banking institutions, the development of the equity and bond markets, and alternative capital sources. Because a firm's access to capital allows it to implement innovative ideas and contribute to technological advancement, job creation and quality of life, the index is a tool for measuring how countries can act to reduce more fully their lending barriers. There are 122 countries ranked in the index, based on the availability of accurate and adequate data.
The Capital Access Index top 10 markets (with 2006 rankings):
1. Hong Kong (1)
2. United Kingdom (3)
3. Canada (4)
4. Singapore (2)
5. Sweden (10)
6. Ireland (9)
7. Switzerland (7)
8. Australia (6)
9. Finland (13)
9. Norway (11)
The full list of rankings is available here.
Hong Kong maintained its position in first place in this year's index. Its general financial environment is among the world's best, with a sound banking system, a relatively large equity market and diversified sources of business funding, including venture capital.
The United Kingdom stepped up from third to second, closely followed by Canada, which moved up from fourth. The United States, which dropped from fourth to fifth last year, slipped off the top 10 rankings completely (Finland and Norway tie at 9th) in the 2007 index, to 11th place. This was due to a weaker macroeconomic environment, including higher and more volatile interest rates and higher inflation, compared to the other top 10 countries.
The biggest improvements in this year's index were from Israel, which jumped up 13 places (12th, up from 35th), and Lithuania, which moved up 12 places to 28. Israel's gain in the index reflects lower personal and corporate interest rates, a reduction from 42 percent to 31 percent, an increase in bond issuance relative to GDP and an increase in alternative sources of capital such as private placement, which rose from 3.9 billion in 2005 to 8.1 billion over the prior year.
Among the top 10, all countries generally had decreasing scores in the area of international access, which measures local firms' ability to access funds outside of their countries' borders. According to the report, capital continues to flow into emerging markets, with their high demand for capital and attractive potential returns. This makes it harder for the top 10 to compete for global capital.
- China improved, moving from 47th to 45th in the rankings. It remains the top destination for foreign direct investment, but as Chinese companies look to invest abroad, the availability of capital within the country is constrained for smaller firms.
- Latin American countries clustered in a similar range with unimpressive performance, which reflects the region's structural reliance on government bonds, limiting the development of the corporate bond sector.
- Most Middle Eastern countries declined in the index, due to a lower stock market capitalization, relative to GDP. The region also suffered from higher inflation relative to other regions.
- African countries continue to congregate at the bottom of the index; 22 of the 30 lowest-ranking countries are African. While there is much to be done in the region, the report notes that the "development of a strong equity market might generate the largest improvement."