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economic outcome environment metrics


Outcomes matter: Do aggregate economic profit outcomes align with established metrics about national business environments?

Published 23 January 2024 in Finance • 4 min read

The economic profit measure developed in the Crux of Capitalism initiative is based solely on reported firm performance. As such it departs from established metrics of the national business environment, parts of which are based on perceptions of national policies and institutional effectiveness. Here we compare across countries and over time to assess where our outcome measure confirms or departs from the high-profile, established metrics of the national business environment.

Following the reasoning of Stiglitz et al. (2009), “…what we choose to measure and how we construct our measures can have such an important role in the decisions that are made…”, we revisit the metrics employed to assess national business environments. Some of them rely on institutional factors which are determinants of national economic performance rather than outcomes, while others exploit survey responses which are essentially perception-based. Policymakers might value a national measure of economic dynamism that is rooted in actual firm performance. This is precisely where the Crux of Capitalism’s measure of economic profit comes in: a bottom-up approach assessing country-level performance by aggregating firm-level data. Economic profit links firm-based performance to pressures for business transformation, corporate restructuring, and other departures from the status quo.

We adjust standard firm accounting profit measures by adding back voluntary expenditures such as R&D investments and by subtracting the effective tax taken, as well as the opportunity cost of capital being tied up in a certain company. The resulting firm-level economic profit is then aggregated up to generate the national economic profit measure at a point in time.

What sets them apart is a better combination of factors, technology, and expertise

To examine whether it is worthwhile adding economic profit to the analytical repertoire, we draw on three well-known indices of country-level performance – IMD’s World Competitiveness, the WEF’s Global Competitiveness, and the World Bank’s Ease of Doing Business. These measures link national competitiveness/ease of doing business to the set of institutions, infrastructure, and policies that determine the level of productivity of a country. Here we discuss three of the findings from comparing each metric with our national economic profit measure:

1. Countries that score higher in terms of competitiveness also tend to generate higher economic profit (EP) margins. While EP/revenue has a moderate positive (Spearman) correlation with both the IMD and the WEF scores (0.28 and 0.38 respectively), these are significantly weaker than the correlation between the two competitiveness scores (0.83). Looking at the supply side of economies through the economic profit lens enables us to identify countries that clearly depart from their evaluation by established metrics. First, large emerging markets (e.g., India, Russia, South Africa) except for China tend to generate higher EP margins than traditional metrics predict. Second, G7 countries with similar business environments present a large discrepancy in terms of economic profitability. For WEF scores near 80, Figure 1 displays EP margins of almost the entire range: from Canada (0.3%) to Sweden (4.9%).

2. Once the national business environment is set up right, labor productivity (EP/worker) explodes – resembling a hockey stick relation. Initially, labor productivity, which we define as economic profit per worker, strongly depends on institutional components. However, after the business environment reaches a certain stage of development enabling efficient economic activity (scores ~70-80), our productivity measure clearly departs from existing metrics. Countries at the productivity frontier such as Switzerland, Sweden, Netherlands, and the United States, do not owe their success exclusively to the right business environment. What sets them apart is a better combination of factors, technology, and expertise. Recalling our economic profit definition that adds back voluntary expenses, high labor productivity reflects, amongst others, high spending on R&D and restructuring per worker, which in turn will boost labor productivity further.

3. Between 2015 and 2019, labor productivity (EP/worker) of the median country improved by ~50%, while business environment scores increased by not more than 7%. Only a few countries demonstrated increased supply-side metric scores with unchanged or negative labor productivity growth, highlighting in general the co-movement of these measures. EP, however, has a much broader scale than existing measures that are limited to a scale from 1 to 100, enabling policymakers and other stakeholders to identify more subtle changes. Spain, for instance, had clear improvements in terms of EP/worker (plus 400%), starting from a negative EP in 2015 (minus 230 USD per worker), reflecting perhaps the long-lasting effects of the financial crisis and housing bubble collapse. The improved performance, however, only translated into a 13% increase in the WEF score, while the IMD and WB scores did not truly capture this development.

While governments can shape the national business environment, they should also care about corporate outcomes. Our aggregate economic profit measure can be used to generate metrics that indicate whether business environment improvements are translating into sufficient value creation.


Camilla Erencin

Camilla Erencin

Ph.D. candidate in Economics at the University of St.Gallen

Camilla Erencin is a Ph.D. candidate in Economics at the University of St.Gallen and holds a M.Sc. in economics from the University of Warwick. Her research focuses on corporate performance and competitive strategy under uncertainty.

Simon Evenett

Simon J. Evenett

Professor of International Trade and Economic Development at the University of St. Gallen

Simon J. Evenett is currently a Professor of Economics at the University of St. Gallen and on 1 August 2024 will join the Faculty at IMD. He is also  Co-Chair of the WEF’s Global Council on Trade & Investment and the Founder of the St. Gallen Endowment for Prosperity Through Trade, home of two of the leading independent monitors of how governments shape international business.

Alexander Gruber

Alexander Gruber

Research fellow and lecturer in economics at the University of St.Gallen

Alexander Gruber is a research fellow and a lecturer in economics at the University of St.Gallen. Alexander completed his Ph.D. studies in economics and finance at the University of St.Gallen and at Stanford University. His research focuses on international macroeconomics, banking, and financial stability.

Felix Reitz

Felix Reitz

PhD candidate in international affairs and political economy at the University of St Gallen

Felix Reitz is a PhD candidate in international affairs and political economy at the University of St Gallen, Switzerland, and holds a Master’s in international political economy from the London School of Economics and Political Science. Reitz focuses on fiscal policy, international taxation, and corporate strategy under uncertainty. 


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