Sheraz Rafique

Literature Review: Theoretical Framework Whenever GDP of any country is measured then the question arises towards the formal procedures of starting the business activity in a country. While analyzing the formal and legal procedure for starting any business activity then the critical factors which are participating in assessment comprises of factors such as time to incorporate the business entity, fees payable for incorporation, mode of payment and number of procedures for the registration. All these factors are drawn with the help of study of economic theories of regulation provided after studying the economy of Peru (De Soto, 1990a). Another study (Pigou, 1938) on the topic of Public Interest Theory of Regulation highlighted the fact of frequent failures due to absence of unregulated markets and creation of monopolies in the economy. This study also emphasize on the protection of the NBE 1. Entry of NBEs will enable the end-user customers to have the high-quality products and services which will be ensured by the scrutiny of regulatory bodies of government with the help of standardized protocols. This kind of measures reduces the chances of business failures in any economy. When we say that the procedures in the regulatory framework must be aligned with the benefits to the general public and other entities in the country then very comprehensive and complete system of registration is supposed to be followed by the new entrants after implementation of the simplified, rigorous, and completed automated system for registration of firm through one-window operations. This kind of initiative reduces the costs of starting business, time of registration of business, and increase the number of registrations of businesses in any economy in addition to the superior outcomes after integration with the society (SRI International, 1999). Another theory highlights the disadvantages of procedures and regulations in accordance with the demands of the industry and producers. These regulations are against the social norms and values while in the favor of industry and producers operating in the economy. According to the authors (Peltzman, 1976; Stigler, 1971; Tullock, 1967), every industry is supposed to be followed by some SOPs2 in the form of Government Rules and Regulations in order to establish the lucrative business environment in the economy. These controls in the form of strict regulations are enforced for the purpose of putting barriers to entry of new entrepreneurs and increase the profits of the already prevailing producers and suppliers of the market. 1 2 NBE – New Business Entrepreneurs SOPs – Standard Operating Procedures There was another theory regarding the public choices was renowned as the tollbooth perspective pointed out the politicians in addition to the bureaucrats as the main beneficiaries of the whole system (Shleifer, Andrei, 1998). The benefits to the political personalities are found in the form of contributions for the purpose of campaign to achieve target of more votes and give bribery to attain the personal gains. The bribery is demanded for the purpose of issuance of permits and licenses and till the time extra amount is not paid to the issuing authority other than the original payable amount. This kind of delegation of authority and power is the main cause of backwardness and important developments in any country (McChesney, 1987). So, It can be said that both the theories are very positively correlated to each other (De Soto, 1990b). The ease of doing business main motive is to draw the legal and implementation framework on the legal form of business based on its size, location and nature of its internal operational capabilities which are directly or indirectly affecting the internal systems of the country. Verification and cross-checking of the targeted indicators at different occasions are observed, tested, and finally verified after the enactment of those reforms in the country by the institutes involved in the relevant procedure (Simeon Djankov, Rafael La Porta, 2002). While the publishing and realization of those reforms are only based on the feature of consistency and fluency of operations through those procedures among the list of 190 countries. These benchmarks are assumed as authentic only if the relevant laws, regulations, and fees involved are found at large scale or approved by the higher authorities of the regulatory bodies of the country in writing. This aggregated score or index becomes the Ease of Doing Business index. It comprises of Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Minority Investors, Paying Taxes, Trading across Borders, Enforcing Contracts, and Resolving Insolvency (Wouters, 2015). The problems to the growing economies (like Bangladesh, Sri-Lanka, Pakistan and many more) like attracting foreign direct investments (FDIs) and making the environment of doing business efforts more fruitful for the economy made very difficult due to the presence of political and administrative corruption, bad governance, and captured state by few individuals of the civil bureaucracy in the country having transition phase of development. Despite of achievements of the remarkable EODB reforms by Pakistan and recognition of Pakistan as the fastest growing economy globally in addition to the fact that Pakistan is falling in the grey list of Financial Action Task force (FATF) which is the biggest threat to the economy of Pakistan in terms of encouraging the foreign investors, Pakistan is receiving the remarkable amount of foreign direct investments (FDIs) on monthly basis more than the highly developed economy of Vietnam (Nguyen, 2016). FDI of Vietnam as per Ministry of Planning and Investment, Vietnam FDI Position of Pakistan as per State Bank of Pakistan Despite of increasing unemployment from the beginning of the tenure of current government in Pakistan after 2018 election in addition to the hyper-inflation in the country due to circular debt payments for the unpaid loans of IMF after accepting the terms and conditions of IMF as lender to increase the prices of basic necessities like electricity charges, petrol prices and all other basic needs, economic crisis due to uncertain policies of the government started increasing rapidly and deliverables became very difficult. “EASE” in the context of doing business in the country refers towards the lucrative regulatory environment in relation with the transparent and accessible policies of the country. This will ensure the economic growth in the business entities as well as in the country’s GDP3 (Ani, 2015). This ease is supposed to be measured with the help of GPIs 4 which are comprised of perceptions and image of the state and government in the minds of the people and global environment of business through the empirical evidences and arguments based on rational decision 3 4 GDP – Gross Domestic Product GPI – Global Performance Indicators making (Doshi et al., 2019). The basic aim of every country related to business activities is to encourage and increase the industrialized societies through the efficient dealing of the provision of basic infrastructure of energy supply system using hybrid mode (supply mix of advanced & traditional approach) for the fulfillment of needs of the industry. It also set focus on the reliability of designs, efficiency of operations, safety needs during business activity, and cost of the business setup (initial, regulatory, and operational) (Wouters, 2015). The world bank group was the first institute which developed the standards to measure the environment of the business operations in any country after the extensive research and development. This research indicated “10” indicators of measuring progress in the country to ensure the sustainable and long-term economic development. Some macroeconomic exclusions are also found in the measurements which are not supposed to be dealt in this subject matter like stability position of the system, corruption at different levels, poverty, and level of employment in a country in addition to the financial market related regulations, environmental issues and regulations related to the intellectual property (Group, 2020). This concept of EODB was first introduced in 2002 by some renowned economists (Simeon Djankov, Rafael La Porta, 2002) with the study of 85 countries at initial stages. It was further studied through more publications by the lead authors (Simeon Djankov & Andrei Shleifer) suggested with 5000 regulatory reforms after studying 190 countries until 2020. It took 18 years after intensive empirical research to reveal and develop the sustainable mechanism and framework after analyzing the results of initiatives taken by Vietnam back in 2002 on serious grounds. This whole framework is having a support of different stakeholders especially policy-makers & development experts of the country in order to eliminate the chances of Red-Tapism and ensure the development of the economy through reforms based professional environment for public administration in the country (Group, 2020). Nudging – Most useful tool for the Government of Steering Choices Nudging is the method of involving the stakeholders without coercing them in their choices even in carelessness and forgetful attitude through the wise choices intentionally and intentionally. This tool of nudging is the mode of intervention for the purpose of changing the behavior of the people in a predictable way along with the economic incentives. The concept of nudging does not involve the forceful implementation to get the desired outcomes such as subsidy, tax, fine or a jail sentence are not the tools of nudging. In fact, nudging gives the opportunity and freedom to make the choices of free will. Informing people is also the form of nudging because rational choices are offered to the people in order to modify their behaviors in a positive way. Nudging can also be called steering the people for the attainment of planned goals. Steering can be done through encouraging the people with strong incentives or discouraging the people with weak incentives, informing the stakeholder with the relevant information, motivation of individuals through the emotional stimulation in order to activate or incite the positive attitude, giving training and development through education till the deliberate capacities, deceiving the people through spread of false information, brainwashing of the parties through the choices like drugs, hypnotism or subliminal images, or deliberative neutralizing of the foibles (Hausman, 2018). Few authors (Conly s., op. cit; Gru ne-Yanoff, R. Hertwig, op. cit.; d. hausman, 2010) have mentioned the tool of nudging as the problematic tool due to the consequences like Most of the stakeholders feel disrespectful during while nudging in implemented by government bodies. The objection of nudging undermined autonomy is of very critical challenge because of the character of controlling the picks of associated events without their deliberations and critiques in their alternatives. Nudging is likewise beneficial as it's miles concerned with the blessings like direct economic incentives, assist from the social system, fitness care infrastructure, and different sizable gamers of the medical control with the aftereffect of dealing with extreme compliance of the suitable procedures. Deliberate flaws can be highlighted and spread during the process of nudging. Autonomous nature of the matters is undermined during the process of nudging and impression like superiority and arrogance is given by the authorities or change agents during nudging are also recognized as the objections in “Nudging” These objections are easily noticeable as the nudging process keep the people away from learning from their own experiences and mistakes. These empirical relations are the best source of learning as deliberate mistakes teach the lessons in real sense and people are used to avoid in future endeavors. These disadvantages of nudging can be reduced with the better tool like informing the stakeholder through on the job and off the job training and development. The objection of nudging undermined autonomy is of very serious concern due to the nature of controlling the choices of related parties without their deliberations and evaluations of their alternatives. Nudging is also helpful as it is involved with the benefits like direct financial incentives, support from the social system, health care infrastructure, and other significant players of the clinical management with the aftereffect of facing severe compliance of the appropriate procedures. PRINCIPLES OF SUCCESSFUL NUDGING Nudging is also successful only if it is properly calibrated with the proposed policies regarding the implementation of programs through the utilization of minimum resources due to scarcity and maximum output generation. The most important thing to deal while nudging is practiced for the maximum benefit is that the coercion should be avoided and interventions are only supposed to be done with the free will and better incentives for some time and then restore the balance at original values for increasing participation at initial stages (Management, n.d.). MOSTLY INFLUENCIAL IN COGNITIVE BIAS BEHAVIOR Nudging plays a vital role in a positive sense when the behavior of respondents is not sensible and not in their best interest because a good suggestion with the solid fact and figures plays very important role in modification of opinions and choice of decisions. It can be best described with the example of a person having no knowledge of investing the savings and a sensible option is given to that person as nudging with the actual pros and cons about that option which will help in fair and sensible decision making regarding that investment opportunity (Troussard & Van Bavel, 2018). NUDGES HELP IN DECIDING ABOUT THE BEST INTEREST CHOICES Nudging is very helpful in making the right choice such as getting the ideas itself is not a nudging but it also saves time and effort of the person who is about to decide and who is indifferent in making choice with the help of knowledge which is gained through the process of nudging. This helped the people in deciding without wasting their time and opt out for something which is in their reach and understanding (Toke & Jeppesen, 2017). LIMITED EFFECTS OF NUDGING ON SOME MATTERS Nudging has very limited impact on the behaviors where preferences in a mindset are involved for the decision making because the most difficult and time-consuming thing in the world is to change or brainstorm the mindset of some person according to your will or desire. At this point, this process of nudging have no impact due to the reason that it becomes inevitable to change the behavior of person due to their mindset from a long time. Likewise, if a specific change agent wants to modify the preference of people of Pakistan regarding vote casting in election to party of Nawaz Sharif and people are also aware about his conviction in different cases but their sympathy and emotional attachment will not allow them to modify or change their preference of voting. OBSTACLES IN THE PROCESS OF NUDGING Mostly nudging helps the policy makers and change agents in modification of behaviors but it is failed due to  poor communication &  counter-nudges (Tinkler, 2011) Four theoretical models of investment behavior, namely the 1. Accelerator Theory for Investment 2. The Neoclassical Theory Of Jorgenson for Investment 3. The Q-Theory Of Tobin for Investment And 4. The Option Theory for Investments The Green Tobin’s Q Theory: Basic theme of Tobin’s Q Theory states the relationship between stock market and investment through the formulae and key decision-making situations Q = market value of the firm / replacement cost of capital Or Q = Value of Stock market places on the firm’s asset / Cost of producing those assets Key Decision-making indicators: I. II. If q ratio is high -> means the price of share is high (attractive opportunity for investors) If q > 1 then Firm will buy physical capital to increase the Capital Stock (Additional Capital will be acquired due to the increased value of capital comparative to the cost of acquisition) which will result as investment will increase SHORT RUN SITUATION IN Q-THEORY: Increase in demand curve due to increased (rightward shift of Demand Curve) demand for desired capital => Increased price of capital stock => Gap existence due to Actual Capital Stock remained at (Ko) and desired investment increase at (I1/ K1) due to requirement of addition capital to produce more outputs in the short run which is not possible. LONG RUN SITUATION IN Q-THEORY: The gap in between Capital Stock and desired increased investment flow is filled using Flexible Accelerator Model of Investment (Advance form of Keynesian approach with flexibility through addition of uncertainty, profits, financial factors, environmental factors and other external relevant variables after reformulation) while analyzing investment behavior in developing economics in addition to the adjustments made in the desired capital stock which is not supposed to be instantly such that New Desired Capital Stock (K1) = Actual Capital Stock (K1) Introduction of new technologies (pollution free) as NEXUS of financial performance and environmental efforts such as renewable energy and green technology with increased profits through reduction in environmental damages. - Focus on Corporate Social Responsibility (SCR) and Corporate Financial Performance (CFP) of Business - Aim of doing well and doing good through Socially Responsible Investing (SRI) and Environmental, Social and Governance (ESG) - Higher the value of capital in the financial market than its cost to produce it => more attraction towards that opportunity for growth (Q > 1) - Cost reduction such as reduction in cost of raw materials and labour, cost of capital, energy, services, and risk management related to relations with external stake holders can be achieved through improved financial performance after imposing better environmental performance measures as well as the revenue maximization (i.e., better exposure to target markets, possible sale of technologies with pollution-control equipment and more differentiated products). - Direct Negative impact in between Return on Asset and Tobin’s Q Theory - Direct Positive impact in between Tobin’s Q Theory after interaction with ECSR (focus on harmed financial performance due to potential cost) & R&D (effort to reduce the potential costs through R & D is fruitful) JORGENSON’S MODEL OF INVESTMENT - Neo-classical alternative to the accelerator model based on Cobb-Douglas Production Technology with the several restrictive assumptions comprises of rational expectations, unitary elasticity in capital and labor substitution, exogenous product prices, reversible investments, minimization of production costs over periods of time, and constant rate of interest for capital hedging facility. - No backup plans for uncertainty & assumption of depreciation as a replacement cost of firm’s assets in tax purposes - Investment => distributed lag function in desired capital modifications => Function based on level of output, Price of output and the user cost of capital ACCELERATION MODEL for investment: - Independent from price of capital => not practical suitable for theoretical framework - Most popular accelerator model is the flexible accelerator model in applied work due to the basis on firm-level variables largely as it obtains the relevant data from inside the firm’s internal environment OPTION METHOD OF INVESTMENT: - Option method is not assumed as the obligation but as the right of the business decisions by the firms and individuals regarding investing opportunity in the tangible assets o for tangible asset’s transactions & o financial decision making in case of trading of assets in the form of common stocks, preferred stocks, or bonds - 3 Common Real Options Models (econometric based) not applicable on this study but helpful in catering the uncertainty in investment behaviour o Black-Scholes option pricing model (Black & Scholes, 1973) o Binomial Option Pricing Model (Cox et al. 1979) o Dixit-Pindyck model (Dixit & Pindyck 1994) - Most common options are comprising of o Deferment option in case of uncertainty causes delay in the start of an investment project due to unseen events (i.e., involvement of sunk cost and uncertain economic environment) o Time to build option o Altering the operating scale o Abandon option o Switching option o Growth option o Multiple interacting option MAIN FACTORS IN THE VIETNAM ECONOMIC GROWTH: - Transformation of economy from micro level to Sate Owned Enterprises (SOE) through Leontief Production Function back in 2002 which states that Factors of Production such as Labor and Other FOP (Variable FOP and Fixed FOPs after pre-determined technology) will be utilized in a fixed proportion without the option of substitutability in between them. - Focus on Total Factor Productivity (TFP) as a new technology in addition to Human Capital being a part of better organizational system while striving to eliminate the bribery (as a hidden overhead cost) out of the system as well as over utilization of the physical capital during the tenure of- Recommendations to Pakistani Policy Makers: 1) Implementation of LEONTIEF PRODUCTION METHODOLOGY in Pakistan for Secondary sector 2) Implementation of SOLOW MODEL FOR ECONOMIC GROWTH in Pakistan - IT states that ECONOMIC GROWTH IN AN ECONOMY MUST BE ANALYZED OVER TIME AFTER THE COLLECTION OF DATA REGARDING THE FACTORS LIKE TECHNOLOGICAL PROGRESS, SAVINGS RATE AND POPULATION GROWTH RATE FOLLOWING THE CONSTANT RETURNS TO SCALE METHOD OF PRODUCTION. 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