The Relevance of a Sound Closing Business Framework in Developing Countries

The Relevance of a Sound Closing Business Framework in Developing Countries

Omar Garcia-Bolivar (BG Consulting, USA)
DOI: 10.4018/978-1-5225-5541-4.ch001

Abstract

A sound framework for closing business is crucial for developing the economy. It breaks up nonviable businesses, saves viable businesses, and improves credit access. Many countries lack insolvency frameworks, ignore its usefulness, or disregard its applicability. Similarly, among many businesses, there is a lack of knowledge of the benefits of the insolvency regime. Latest developments of bankruptcy laws show that there are options other than mere liquidation of the business. Restructuring, ongoing concern sale, or piecemeal sale are some of the possibilities referenced in the chapter.
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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:

  • 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).

  • 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).

  • 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).

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