Why Singapore is Less Risky than the U.S.

PwC's Opacity Index identifies the best and worst countries in which to conduct business.
Jennifer CaplanFebruary 14, 2001

There are many obvious benefits of expanding internationally, including access to larger markets and the availability of cheaper labor and capital.

But as managers of multinational corporations well know, there are also many risks involved.

The trick is to hedge those risks in order to tilt the balance to the benefit side. PricewaterhouseCoopers’ (PwC) Opacity Index is one way to measure the risks of foreign investment, and is intended to help business leaders better gauge the economic impact of international business development.

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On January 29, PwC released the latest study of its opacity index research, which found that opacity imposes a “hidden corporate tax” and increases the risk premium involved in raising capital. The study was developed from surveys of CFOs, equity analysts, bankers, and PwC consultants in each country.

What exactly is opacity? PwC defines it as the lack of “clear, accurate, formal, easily discernible and widely-accepted practices.”

“The Opacity Index will help [corporate] investors make more informed decisions about where they commit their resources and the return they can expect on their investments,” says James Schirio, CEO of PricewaterhouseCoopers, in a recent press release.

The index is an aggregate measure of opacity in the following five areas: corporate reporting and accounting; legal protection for business; macro-economic policies; government regulations; and corruption. The lower the opacity factor, the more attractive a country is as a target for foreign direct investment.

Conversely, a high degree of opacity in any of the above areas will raise the cost of doing business and hinder the flow of investment capital.

The study also argues that a one-point increase in the opacity factor leads to a 25.5 basis point rise in the interest rate that investors demand to purchase newly-issue bonds originated in that country, thus increasing the difficulty of countries with high opacity indices to borrow through sovereign bond issuance.

So, according to the opacity index, where are the best places to conduct business? Surprisingly, Singapore ranks first in all categories except for accounting standards/corporate transparency. As a result, it racked up an opacity factor of 29, the lowest on a scale from zero to 150.

It is followed by the United States and Chile, each of which wound up with a score of 36; the U.K. (38), Hong Kong (45), and Mexico and Italy, each with 48.

On the other hand, the country with the greatest opacity factor is China (87), followed by Russia (84), Indonesia (75), Turkey (74), and South Korea (73).

What’s more, when it comes to accounting and corporate governance, one of the five areas measured by the opacity index, South Korea was the most opaque with a factor of 90. It was followed by China with 86 and Japan and Russia, with 81.

On the other hand, the U.S. was most transparent with an opacity factor of 25, followed by Italy (26), Chile (28) and Mexico (29).

In terms of legal and judiciary opacity, including shareholder rights, Russia was by far the least opaque with a factor of 100, followed by the Czech Republic (97), and Indonesia (86). The most transparent were Singapore and Chile (32) followed by the U.S. (37) and the U.K. (40).

According to the study, high levels of opacity have the effect of imposing a surtax on foreign direct investment.

For example, Singapore, which had the lowest opacity factor, imposed a zero percent tax on companies that invest there. On the other hand, China, the country with the highest indicator, imposed the steepest tax on direct investment–the equivalent of a 46 percent corporate tax. An increase in opacity from the Singaporean level to the Chinese level, therefore, has the same negative effect on investing as raising the corporate tax rate by 46 percent.

The report points out that this finding is somewhat ironic since many countries that are eager to attract investment do so by cutting taxes often offering tax concessions to foreign investors. The study contends, however, that a reduction in opacity can substitute for a tax cut while simultaneously improving the fiscal position of governments.

“Domestic reforms that reduce opacity may be as effective as a tax cut in boosting domestic investment and attracting foreign investment without sacrificing tax revenues,” the study says.

High opacity, on the other hand, is often a byproduct of deep-rooted corruption and an insidious climate of lawlessness that pervades many of the world’s economies and is difficult to eradicate. Multinationals that are intent on breaking into a particular market have found ways to deal with opacity.

For those that are not so certain about venturing into a specific country, the opacity index may be a useful tool to guide the decision- making process.