The Relevance of a Sound Closing Business Framework in Developing Countries

Relevance Of A Sound Framework For Closing Business

This all shows that a sound framework for closing business is crucial for developing the economy. It provides the following benefits:

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  Breaks Up Nonviable Businesses: Assets of nonviable businesses can be sold piecemeal or as part of a going concern. As a result, the assets reenter into the production process. Closing inefficient firms increases overall productivity. For example, exit of unviable businesses contributed 19% productivity growth in Taiwan, 23% in Korea and 39% in Indonesia in the 1990s (World Bank, 2005; Aw, Chung & Roberts, 2002).

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  Saves Viable Businesses: Business under difficulties can ask for legal protection while restructuring is taking place. As a result, the business continues operating. The economy is not affected. Workers keep their jobs. In Brazil, for example, it was estimated that 400,000 jobs could be saved with a sound framework for closing business (World Bank, 2006; Azar & Lu, 2004).

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  Credit Improvement: Creditors will be given a tool to efficiently collect their credits against a failing business even in the absence of guarantees, an element that might increase the amounts of credits offered, mainly from microcredit entities. With high recovery rates, banks are more willing to lend (World Bank, 2005).