The Best Countries For Business

What do LEGOs, Nokia and 18th century political economist Adam Smith have in common? All three show why Denmark has become the best country in the world for business.

Speaking two decades before The Wealth of Nations was published in 1776, Smith said, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."

If ever there was a system that made following Smith's recipe look easy, it's the Danish economy's mix of low inflation and low unemployment, emphasis on entrepreneurship and lower taxes. These qualities combined with high marks for innovation and technological savvy lift Denmark to the top of our third annual ranking of the Best Countries for Business (formerly the Forbes Capital Hospitality Index).

In Pictures: The Best Countries for Business

To find the best, we analyze business climates in each of more than 120 national economies, focusing on degrees of personal freedoms, like the right to participate in free and fair elections, or freedom of expression and organization.

Investor protection examines the recourse held by minority shareholders in cases of corporate misdeeds, while corruption looks at the number and frequency of similar misuse of corporate assets for personal gain. Together with economic policies supportive of free trade and low inflation, these key points form a snapshot of countries' suitability for capital investment.

Topping the list for 2008: Denmark, which rose three slots from last year, Ireland (up 19 places to No. 2), Finland (up four to third place), the U.S. (down three to fourth) and U.K. (up five to fifth). Big movers like Ireland, Estonia (No. 10, up 24 spots) and Saudi Arabia (No. 47, up 37) have limited bureaucracy standing in the way of entrepreneurs hoping to do business within their borders.

Ireland continued to see businesses take advantage of its low levy on corporate profits as pharmaceutical company Shire (nasdaq: SHPGY - news - people ) became the latest to relocate from the U.K. in April of this year. EBay subsidiary and telecommunications company Skype calls Estonia home, thanks to its emerging profile as a technology center in the Baltics.

Saudi Arabia, despite higher inflation from booming oil exports, has tackled inequities in its markets, expanding investor rights as it evolves from an oil state to a center for investment in the Middle East.

India (No. 64, down 13) and China (No. 79, down two) fell in this year's ranking as political instability demonstrated resistance to increasing personal freedoms. Higher inflation from food and other commodity costs, as well as increased burdens on entrepreneurs also held the world's most populous nations back as business destinations.

In developed nations like Germany (No. 21, down nine) and France (No. 25, down nine), scandals in the banking sector and tougher barriers for entrepreneurs led to declines. Meanwhile, anti-bureaucrat leaders like president Lech Kaczynski and prime minister Mirek Topolanek are succeeding in introducing more business friendly reforms to Europe's smaller participants in Poland (No. 33, up six) and the Czech Republic (No. 29, unchanged), respectively.

One of the biggest declines came from Japan (No. 24, down 21), where a Council on Economic and Fiscal Policy spelled out problems with the world's second-largest economy earlier this year. Among others, the committee's report cites the nation's 40% corporate tax rate as uncompetitive compared with regional rivals like Hong Kong at 17.5% and South Korea at 25%.

Antiquated restrictions on foreign investment are also a concern. So-called cross-shareholdings that limit the ability of foreign investors to take controlling stakes in Japanese companies is just one example of why foreign direct investment totaled a paltry 2.5% of GDP in 2006. That compares to 13.5% in the U.S. and 40% in Britain.

Expertise, research and published reports from the Heritage Foundation, World Economic Forum, World Bank, Transparency International, Freedom House, Deloitte Tax, the U.S. Chamber of Commerce and Central Intelligence Agency all contributed vital analyses of various socioeconomic indicators on the countries included.

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