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An Exploratory Study on the Relationship of Public Governance and Ease Of 75 ARTICLE Asia-Pacific Management and Business Application 6 (2) 75-88 ©UB 2017 An Exploratory Study on the Relationship of University of Brawijaya Public Governance and Ease of Doing Business Malang, Indonesia http://apmba.ub.ac.id Sofik Handoyo* Faculty of Economics and Business, Universitas Padjadjaran, Bandung, Indonesia Abstract Purpose of the study is to explore the relationship of the practice of good public governance in governmental institutions on the performance of the government in terms of its ease of doing a business. The motivation of the study was driven by the fact that each country has different easy of doing business performance even though they are located in the same region. Furthermore, massive competition among countries to attract foreign capital inflow is justification that the research is relevant to be conducted. Easy of doing business is a fundamental factor that determines foreign investor regarding their investment decision. The study examines whether good public governance practice in governmental institutions will have positive implication to government performance in terms of its ease of doing business. The study applied exploratory research design, in which two independent variables were examined. Public governance and easy of doing business performance are two independent variables as an object of the investigation. Indicators namely public accountability, effectiveness government, control of corruption, political stability, regulatory quality and rule of law are a representation of the public governance independent variable. Governance index namely World Governance Index was used for the purpose public governance measurement. Meanwhile, Easy of doing business performance was measured using Index released by World Bank. The total sample was involved including 188 countries of World Bank members. The data was analyzed using bivariate correlation. The findings indicate that all indicators of public governance show positive and significant correlation with ease of doing a business performance. The correlation magnitude shows that majority of public governance indicators have a strong correlation (r > 0.6, p<0.01). Meanwhile, political stability shows moderate correlation ( r = 0.584, p<0.01). The result implies that if the government adopts good public governance principles in public administration, it may have the positive impact on government performance in terms of ease of doing business. Keywords Ease of doing business; Foreign Direct Investment; Governance; World Governance Index Received: 28 September 2017; Accepted: 19 October 2017; Published Online: 29 December 2017 DOI: 10.21776/ub.apmba.2017.006.02.2 *Corresponding author Email: [email protected] Asia-Pacific Management and Business Application, 6, 2 (2017): 75-88 ISSN : 2252-8997 76 Sofik Handoyo Introduction principles such as flexibility, guidance, During the last decade, good governance communication, and persuasion has become a topic of great interest rather than rigid traditional “control among scholars and public sector and command” approaches (OECD, managers, especially starting from the 2011). Public governance is important premise that good governance influences for investors as basic requirement economic prosperity (Knack and regarding country risks. Stability of the Keefer, 1995, Ngobo and Fouda, 2012, government is needed for investment Mauro, 1995). Good public governance planning both medium and long-term. has been identified by academicians, Public Governance by many scholars donor institutions, policymakers and is closely associated with the easiness civil society organization as a pivotal of doing business (Bota Avram, 2014, factor for national development (World Ngobo and Fouda 2012, Çule and Fulton Bank Institute, 2009). Constructing (2013) and poor public governance good governance is the never-ending is believed as a major problem of process and the nation build with good economic development (Ngobo and governance principles is believed Fouda (2012). Good governance can lead the state toward economic leads to a transparent environment prosperity for conducting public affairs, being a promoter of free-market policies, justice, The country with a simple procedure and the rule of law (Ngobo and Fouda, in terms of doing business will attract 2012). Good governance implies fair investor both local and international to regulatory frameworks, accountability, spend their capital in the business sector. and transparent policymaking, all these The role of government in streamlining factors having direct influences on procedure of doing business is very economic activity (Bota-Avram, 2014). crucial. In order to increase easiness of doing a business performance, the Public sectors and private sectors government and the public sector have symbiosis mutualism in terms of must put a major concern on efforts in motivation in achieving their objectives simplification of business regulations efficiently. Private sector expects that that inhibit activities of doing business public sector supports them by facilitating or opening new business (Bota-Avram, regulatory that friendly to business 2014). Effective governments should organization and clean bureaucracy from properly answer to citizen needs, corrupt behavior (Bota-Avram, 2014). promote politically neutral managers, The rationale of public governance and develop a framework of pro- influencing the business environment business policies (Andrews, 2008). is based supposition that control toward corruption is expected to drive economic Public governance, in general, is related performance through reducing high-cost to the making of the public decision economy (Çule and Fulton (2013). and its implementation (OECD, 2011). The countries that practice Academician, bureaucrats, and business good public governance usually adopt profession are inconclusive that FDI inflows are determined by the host Asia-Pacific Management and Business Application, 6, 2 (2017): 75-88 An Exploratory Study on the Relationship of Public Governance and Ease of... 77 country’s factors such as bureaucracy, effectiveness, control of corruption, rule regulatory, efficient legislatures and of law, regulatory quality and political transparent judiciaries, (Alemu, stability. Most studies conclude that 2013). Many governance studies public governance had a positive impact have proved that the quality of public on Foreign Direct Investment (FDI) and governance has a positive relationship easiness of doing business. However, with effectiveness economic resources detail information about attributes of allocations, which finally influence public governance affecting FDI and the stimulation of economic growth easiness of doing business is still not and the competitiveness of business revealed clearly. environment. Literature and Hypothesis (Price et al, 2011. It implies that Development institutions are important for economic growth (Keefer and Knack (1997). Public Accountability and Ease of Research findings revealed that the Doing Business government institutions played an Public accountability refers to important role in the economic success government capacity to respond society and growth in East Asia (Rodrik, in terms of political process, civil 1997). Good governance increases FDI liberties, and political rights (Bota- inflows (Globerman et al, 2006) and all Avram, 2014). It covers participation governance indicators indicated to have of the citizens in terms of selecting a positive and significant influent toward the government (Alemu, 2013). Public the level of FDI inflows (Bissoon, 2012). accountability reflects the involvement of the citizen in running the government Good Public governance institutions through their voice in general election. have the capacity to facilitates The government, as representative of the benefits for private sectors to grow. citizen, therefore must be accountable Tax incentive, fair legal system, and to a citizen for every policy taken. The property right protection are kind of countries with high score index voice outcome produced by good public and accountability indicate that those governance practice that can foster countries are countries that put a weight business organization (Johansson the democracy. 2001). Good public governance practice encourages investment environment Public accountability facilitates friendly and at the end will generate economic investment climate (IADB, 2001, growth Globerman and Shapiro (2003). Siddharthan, 2009). Research findings by Differences in Growth and productivity Globerman & Shapiro (2002) and Méon, across countries are determined by its P.G. and K. Sekkat (2007) indicated governance infrastructure (Kaufmann, that public accountability contributes Kraay, Zoido, Lobaton, 1999b). positively to rising FDI inflows. One of the crucial factors that determine World Bank defines determinants of the magnitude of FDI inflows is a public governance into indicators namely simplification of investment procedures. public accountability, government Since there is a logical relationship Asia-Pacific Management and Business Application, 6, 2 (2017): 75-88 78 Sofik Handoyo between public governance, FDI and regulation will slow down business investment procedure. Formulation of responsiveness, divert resources and can the hypothesis is: potentially hamper business initiation. The quality of regulation was found Hypothesis 1: The higher public significantly influence the investment accountability Index, the higher of ease climate (OECD, 2011).
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