ENTERPRISE SURVEYS WHAT BUSINESSES EXPERIENCE ENTERPRISE SURVEYS El Salvador 2016 Country Profile 1 Contents Introduction......................................................................................................................................................... 3 Firms Characteristics ........................................................................................................................................... 4 Workforce............................................................................................................................................................ 5 Firm performance................................................................................................................................................ 5 Physical Infrastructure ........................................................................................................................................ 6 International Trade.............................................................................................................................................. 6 Access to Finance ................................................................................................................................................ 7 Crime and Informality ......................................................................................................................................... 8 Regulations, Permits, and Taxes ......................................................................................................................... 8 Corruption ........................................................................................................................................................... 9 Business Environment Obstacles ........................................................................................................................ 9 Appendix............................................................................................................................................................ 11 The Country Profiles produced by the Enterprise Analysis Unit of the World Bank Group provide an overview of key business environment indicators in each economy, comparing them to their respective geographic region and group of countries with similar income levels. The same topics are covered for all countries with slight variations of indicators. All indicators are based on the responses of firms. To learn more about the Enterprise Analysis Unit and to obtain Country Profiles for other countries, please visit www.enterprisesurveys.org © 2014 International Bank for Reconstruction and Development / The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank Group with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank Group, its Board of Executive Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. 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The Enterprise Surveys team can be contacted at: The World Bank Group 2121 Pennsylvania Avenue, NW Washington DC, 20433 USA Tel. (202) 479-3800 2 Economy Overview Sector coverage is defined consistently across all economies and includes the entire manufacturing sector El Salvador 2016 and most services sectors: retail, wholesale, automotive Region: Latin America & Caribbean repair, hotels and restaurants, transportation, storage, Population: 6,126,583 communications, construction, and IT. Public utilities, GNI per capita (US $): 3,940 government services, health care, and financial services sectors are not included in the sample (Figure 1). The ES Income Group: Lower middle income interview takes place with top managers and business owners. Introduction The ES are repeated approximately every four years for a The Enterprise Surveys (ES) focus on many aspects of the particular economy (or region). By tracking changes in the business environment. These factors can be business environment, policymakers and researchers can accommodating or constraining for firms and play an look at the effects of policy and regulatory reforms on important role in whether an economy’s private sector firm performance. Repeated surveys aid in studying the will thrive or not. An accommodating business evolution of the business environment and how it affects environment is one that encourages firms to operate the dynamics of the private sector. efficiently. Such conditions strengthen incentives for firms to innovate and to increase productivity — key This document summarizes the results of the Enterprise factors for sustainable development. A more productive Survey for El Salvador. Business owners and top managers private sector, in turn, expands employment and in 719 firms were interviewed March 2016 to August contributes taxes necessary for public investment in 2016. Figure 2 provides a description of the sample health, education, and other services. Questions breakdown across the three survey design categories: contained in the ES aim at covering most of the topics business sector, firm size, and location. mentioned above. The topics include infrastructure, trade, finance, regulations, taxes and business licensing, corruption, crime and informality, access to finance, Figure 1: Sectors of the economy covered by the innovation, labor, and perceptions about obstacles to Enterprise Surveys doing business. Excluded Included SECTORS SECTORS The ES are conducted by the World Bank Group and its Agriculture Manufacturing (all subsectors) partners across all geographic regions and cover small, Fishing Construction medium, and large firms. The size of the firm is Mining Motor vehicles sales and determined by the number of employees: 5 to 19 (small), Public utilities repair Financial intermediation Wholesale 20 to 99 (medium), and 100 or more (large). Firms with Public administration Retail less than five employees are ineligible for the survey. Education, health and social Hotels and restaurants Firms that are 100% state-owned are also ineligible. work Storage, transportation, and Partners for the ES have included the European Bank for communications Reconstruction and Development (EBRD), the European IT Investment Bank (EID), and the UK's Department for ADDITIONAL CRITERIA ADDITIONAL CRITERIA International Development (DFID).  < 5 employees  5+ employees  Informal firms  Formal (registered) firms  100% state-owned firms  Minimum of 1% private The surveys are administered to a representative sample1 ownership of firms in the non-agricultural, formal, private economy. 3 Figure 2: Characteristics of firms surveyed Sector 120 170 Food [120] Textiles & Garments [113] Furniture [62] 113 Other Manufacturing [110] Retail [144] Other Services [170] 144 62 110 Size 153 372 Small (5-19) [372] Medium (20-99) [194] Large (100+) [153] 194 Location 114 326 133 San Salvador [326] West [146] Greater San Salvador [133] East [114] 146 Firms Characteristics Figure 3: Age distribution of firms (percent of firms) 40 35 In addition to collecting information on the business environment and firm performance, the ES also collect 30 information on characteristics of private firms. Figure 3 24 % of Firms shows the distribution of firms in the private sector according to their age, measured by the number of years 20 17 they have been in operation. The effect of the business 12 environment on firm performance may depend on firms’ 10 5 experience and longevity. Also, older firms and young 4 4 firms may differ in their ability to successfully navigate the 0 business environment. 0-10 11-20 21-30 31-40 41-50 51-60 60+ Firm Age (Years) 4 Figure 4 exhibits the percentage of female participation in The incidence of training is measured by the percent of employment, in top management and in firm ownership, firms that offer formal training and the intensity of compared to the equivalent percentages for the region training is measured by the share of workers receiving and for economies with similar income levels. Female training in the manufacturing sector. inclusion in economic activity is necessary for promoting shared prosperity, one of the twin development goals of Figure 6: Within firms offering training, proportion of the World Bank Group. workers trained* 70 68 Figure 4: Female participation in employment, top management and ownership 65 63 60 % of Firms 45 38 60 40 35 35 35 33 28 55 30 25 Percentage 24 El Salvador2016 Latin America & Lower middle 25 Caribbean income 20 16 15 * only for manufacturing firms 15 10 5 Firm performance 0 % of employees % of firms w/ a % of firms w/ If an economy’s business environment is supportive and that are female female top female competitive, resources are often channeled to the most manager participation in productive uses and firms invest to further increase their ownership productivity. Using the responses to questions on annual El Salvador2016 Latin America & Caribbean sales and the total number of permanent full-time Lower middle income employees, both in the last fiscal year and three fiscal years earlier, growth measures can be computed for each Workforce firm. Figure 7 displays the resulting annual growth rate in employment and in real sales. By looking at business The ES collect workforce information such as the number environment measures in conjunction with available of permanent full-time employees, the number of performance measures, policymakers can determine temporary employees, employees by gender, whether which aspects of the business environment may be formal training is offered, and the top manager’s impeding or enabling the growth of the private sector. experience working in the firm’s sector. In addition, for manufacturing firms, the ES also collects the breakdown Figure 7: Annual employment and sales growth of the workforce between production and non- 5 4.5 production workers and between skilled and unskilled 4 3.3 3.1 3.0 production workers. Figures 5 and 6 highlight firms’ 3 investment in the skills and capabilities of their 1.5 2 workforce. % Annual 1 Figure 5: Percent of firms offering formal training 0 60 54 54 -1 Annual employment growth Real annual sales growth (%) 50 (%) -2 40 30 25 -3 % of Firms -2.8 20 -4 10 El Salvador2016 Latin America & Caribbean 0 Lower middle income El Salvador2016 Latin America & Lower middle Caribbean income 5 Physical Infrastructure Figure 9: Days to obtain an electrical connection 40 35 A well-developed physical infrastructure, including roads, 30 24 25 electricity, water and telecommunications, is central to Days 20 competitiveness and growth of an economy. Quality infrastructure efficiently connects firms to markets for 10 inputs, products, and technologies. It reduces the cost of 0 production and enhances the competitiveness of firms in El Salvador2016 Latin America & Lower middle domestic and international markets. Caribbean income For many industries in the manufacturing sector water is The ES capture the dual challenge of providing a strong also an important input in the manufacturing process. infrastructure for electricity, water supply and Figure 10 presents the average number of water telecommunications in addition to information on the insufficiencies in a typical month experienced by firms in development of institutions that effectively provide and the manufacturing sector. Interruptions in water maintain these public services. provision can have serious harmful effects on firms’ operations. Efficiency in the operation of the private sector requires a reliable supply of electricity. Figure 8 shows the extent to Figure 10: Reliability of water supply* which firms face failures in the provision of electricity and 5.5 4.9 5.0 No. of Insufficiencies their effect on sales as measured by the losses they 4.5 generate. Inadequate electricity provision supply can 4.0 3.5 increase costs, disrupt production, and reduce 3.0 2.5 profitability. 2.0 1.5 0.8 1.0 0.5 0.5 Figure 8: Reliability of electricity supply and related 0.0 losses El Salvador2016 Latin America & Lower middle Caribbean income 2.5 9.0 10 2.1 * only for manufacturing firms 2.0 8 1.5 6 International Trade No. of Power Outages 1.1 % Sales 1.0 4 0.5 1.9 Participation in international trade allows firms to 0.5 1.2 2 expand, raise standards for efficiency, import materials at 0.0 0 lower cost, and acquire updated and better technologies. % losses due to No. of power outages However, trading also requires that firms deal with power outages customs and trade regulations, and often firms are also El Salvador2016 Latin America & Caribbean required to obtain export and import licenses. Lower middle income The ES quantify the trade activity of firms and collects Figure 9 displays the efficiency of infrastructure services information on the operational constraints faced when by quantifying the number of days it takes to obtain an exporting and importing. Figure 11 provides a measure of electricity connection. Service delays impose additional the intensity of foreign trade in the private sector, costs on firms and may act as barriers to entry and captured by percentage of firms’ exporting (either investment directly or indirectly) and also the percentage of manufacturing firms using inputs or supplies of foreign origin. 6 Figure 11: Percentage of exporting and importing firms Figure 13 compares the various sources used to finance 80 purchases of fixed assets (investments). Investment 68 66 purchases can be financed by internal sources, banks, 60 inputs’ supplier credit, or other sources, including non- % of Firms 36 bank financial institutions or personal networks. 40 Excessive reliance on internal funds may indicate 17 14 potentially inefficient financial intermediation. 20 12 0 Figure 14 displays two indicators of the use of financial % exporting directly or % using inputs of foreign services by private firms: the percentage of firms with a indirectly origin(manufacturing firms only) checking or savings account and the percentage of firms El Salvador2016 Latin America & Caribbean with a bank loan. The former indicator measures the use Lower middle income of deposit mobilization services which helps firms to manage their liquidity and payments. The second Efficient customs procedures enable businesses to indicator measures the use of financial services on the directly export and import goods. Figure 12 displays the credit side. Availability of credit permits funding projects average number of days to clear customs for exports and that otherwise would be constrained by each firm’s imports. Delays in clearing customs for exports and limited pool of funds. imports create additional costs to the firm, can interrupt Figure 13: Sources of financing for purchases of fixed production, interfere with sales, and may result in assets damaged supplies or merchandise. Figure 12: Average days to clear exports and imports El Salvador2016 20 0 11 62 6 through customs 20 18 16 15 Latin America & Caribbean 18 5 11 59 7 % of Firms 9 9 10 6 5 3 Lower middle income 15 6 3 71 6 0 Exports at customs Imports at customs 0 20 40 60 80 100 El Salvador2016 Latin America & Caribbean % of investment Financed by banks Financed by equity Lower middle income Financed by supplier credit Financed internally Other Access to Finance Figure 14: Use of financial services Well-developed financial markets provide payment 100 94 97 services, mobilize deposits, and facilitate funding for the 79 79 80 purchase of fixed assets – such as buildings, land, 61 % of Firms 60 machinery, and equipment – as well as working capital. Efficient financial markets reduce the reliance on internal 40 30 funds or informal sources such as family and friends by 20 connecting firms that are creditworthy to a broad range 0 of lenders and investors. Small (5-19) Medium (20-99) Large (100+) The ES provide indicators on the sources of firms financing With checking/savings account With bank loan and on the characteristics of their financial transactions. 7 Crime and Informality Figure 16: Firms and informality 100 88 83 83 Firms can become the target of theft, robbery, vandalism, 80 68 or arson. Protecting themselves against crime imposes 66 % of Firms costs as firms are forced to divert resources from 60 52 productive uses to cover security costs. Moreover, both 40 foreign and domestic investors perceive crime as an indication of social instability, and crime drives up the cost 20 of doing business. 0 Compete with informal Registered when started Figure 15 displays the direct costs of security incurred by firms operations firms as well as their losses due to crime. These resources El Salvador2016 Latin America & Caribbean represent the opportunity cost of crime since they could Lower middle income have been invested in productive activities. Figure 15: Firms’ cost of crime Regulations, Permits, and Taxes 4 Good economic governance in areas such as regulations, 3.2 business licensing, and taxation is a fundamental pillar of 3 a favorable business environment. Registered firms pay % of Firms 2 taxes and are supposed to comply with regulations. 1.3 1.3 0.8 0.9 1 0.3 Figure 17: Time tax and meetings with tax officials 0 16 15.0 1.8 1.5 Security costs Losses due to theft 1.6 14 11.2 1.4 No. of Meetings 12 El Salvador2016 Latin America & Caribbean 1.0 1.2 Lower middle income 10 0.9 1.0 % of Time 8 0.8 6 4.0 0.6 When firms are formally registered, they are required to 4 0.4 abide by rules and regulations, which are commonly set 2 0.2 by governments. Paying taxes is usually the most tangible 0 0.0 consequence of becoming part of the formal private Senior mgmt time w/ No. of tax meetings in a sector. Some firms try to avoid these consequences by govt regulations year not registering their business and thereby remaining in El Salvador2016 Latin America & Caribbean the informal sector. A large informal sector may represent Lower middle income a challenge to competing formal firms as informal firms Permits and licenses are usually required for business to are able to engage in practices that can give an unfair operate, build a new structure, and to import directly, advantage over formal firms that must comply with the among other activities. Ideally, these regulations and prevailing rules and regulations. permits safeguard the general public’s interest while remaining transparent and not imposing heavy burdens Figure 16 provides two measures of the incidence of on the private sector. informality in the private sector. The first indicator is the percentage of firms that indicate that they face The ES provide quantitative measures of regulations such competition from unregistered or informal firms. The as business licensing and taxation. Figure 17 illustrates second indicator is the percentage of currently registered the “time tax” imposed by regulations, which is the firms that started operations being formally registered. percentage of time spent by senior management dealing with regulatory compliance. Figure 17 also presents the number of required meetings with tax officials in a year. 8 Figure 18 focuses on the efficiency of business licensing The ES capture individual transactions where bribes may and permit services. The indicators measure the time be solicited. Figure 20 displays the extent to which firms required to obtain an import license, a construction are requested to pay a bribe in order to receive selected permit, and an operating license. Delays in obtaining public services. Businesses may be asked to pay bribes licenses can be costly to entrepreneurs as they add when they request a construction permit, while trying to uncertainty and additional costs to much needed business secure a government contract, or during meetings with transactions. tax officials. These three types of transactions are common instances where opportunities for bribery occur. Figure 18: Number of days to obtain permits 120 Figure 19: Bribery Incidence (percent of firms 98 experiencing at least one bribe payment request) 100 30 80 69 24 54 % of Firms 60 20 Days 40 33 31 10 27 22 18 10 20 11 4 0 0 Import license Construction Operating license El Salvador2016 Latin America & Lower middle permit Caribbean income El Salvador2016 Latin America & Caribbean Lower middle income Figure 20: Percentage of firms requested or expected Complying with regulations is costly for businesses. to give gifts or informal payments Excessive or inefficient regulations can discourage private 50 sector activity and foreign direct investment. 39 40 35 28 Corruption 30 % of Firms 18 20 15 12 Corruption by public officials can be a major 9 6 10 administrative and financial burden on firms. Corruption 1 creates an unfavorable business environment by 0 undermining operational efficiency and raising the costs For construction For govt contract In mtgs w/ tax permit officials and risks associated with running a private firm. El Salvador2016 Latin America & Caribbean Inefficient regulations constrain firms’ operations as they Lower middle income present opportunities for soliciting bribes, where firms are required to make “unofficial” payments to public officials to get things done. In many economies bribes are Business Environment Obstacles common and quite high and they add to the bureaucratic Most indicators in the ES are derived from survey costs in obtaining required permits and licenses. They can questions that ask businesses for their actual experiences be a serious impediment for firms’ growth and dealing with the business environment. For example, development. “How many days did it take to get a permit?” or “How many hours did the power outage last?”. A small number Figure 19 provides a composite index of corruption, the of survey questions ask business owners or top managers bribery incidence, that reflects the percentage of firms for their subjective opinion regarding the importance of experiencing at least one bribe payment request across various business environment elements. six different transactions including paying taxes, obtaining permits or licenses, and obtaining utility connections. Figure 21 shows the percentage of firms that consider a specific business environment obstacle as the most important one. The respondent was asked to choose the 9 biggest obstacle to their business from a list of 15 perceptions of managers of medium and small firms. This business environment obstacles. The figure presents the is related to the capacity to navigate business top 10 ranking obstacles compared to the regional environment obstacles: larger firms may have more averages. options to face obstacles but at the same time they are also more visible and more exposed to failures of the Figure 22 displays the top 10 obstacles for small, medium, business environment. and large firms. In many economies, the perceptions of managers of large firms are very different from the Figure 21: Top ten business environment constraints (percent of firms) 35 El Salvador2016 Latin America & Caribbean 30 29 25 19 % of Firms 20 17 15 10 10 5 5 4 4 4 5 1 0 Crime, theft Practices of Political Tax rates Access to Customs and Business Inadequately Corruption Electricity and disorder the informal instability finance trade licenses and educated sector regulations permits workforce Figure 22: Top three business environment constraints by size (percent of firms) Small (5-19 employees) Medium (20-99 employees) Large (100+ employees) 35 30 30 26 30 30 25 25 23 20 25 25 20 19 % of Firms % of Firms 20 % of Firms 20 15 13 15 15 12 15 10 10 10 5 5 5 0 0 0 Crime, theft Practices of Political Crime, theft Political Access to Crime, theft Political Business and disorder the informal instability and disorder instability finance and disorder instability licenses and sector permits 10 Appendix The following tables contain the values of all indicator variables used in the country profile. Latin Lower El Small Medium Large America & middle Salvador2016 firms firms firms Caribbean income Firm Characteristics Age of the establishment (years) 21.7 20.4 23.7 28.3 20.4 16.6 Gender Percent of firms with female participation in ownership 38.4 35.3 47.8 37.8 32.9 24.0 Percent of firms with a female top manager 28.0 26.5 37.7 7.7 16.1 15.4 Proportion of permanent full-time workers that are female (%) 34.7 34.8 35.2 32.5 34.9 25.2 Percentage of permanent full-time non-production workers that 37.8 38.8 34.7 39.9 40.2 20.4 are female. Percentage of permanent full-time production workers that are 28.4 28.1 24.0 35.7 21.4 18.1 female. Workforce Percent of firms offering formal training 53.8 42.3 79.3 89.4 53.6 25.3 Proportion of workers offered formal training (%)* 68.3 47.2 82.2 70.0 63.2 60.3 Years of the top manager's experience working in the firm's 21.2 20.9 22.2 21.3 21.1 14.5 sector Number of permanent full-time workers 30.5 8.7 39.7 250.6 58.6 40.3 Number of temporary workers 3.0 1.6 5.0 13.1 7.2 5.0 Number of permanent production workers* 52.5 5.2 26.2 223.5 45.5 52.3 Number of permanent non-production workers* 17.7 4.5 13.5 60.7 22.1 11.9 Number of permanent skilled production workers* 33.2 3.8 17.1 140.7 26.1 37.1 Number of permanent unskilled production workers* 11.5 1.4 9.3 43.1 17.7 14.2 Proportion of unskilled workers (out of all production workers) 24.3 18.8 31.6 29.3 38.1 28.2 (%)* Performance Real annual sales growth (%) 3.1 3.3 3.2 0.8 3.0 -2.8 Annual employment growth (%) 1.5 0.1 5.3 3.5 4.5 3.3 Infrastructure Number of electrical outages in a typical month 1.2 1.1 1.5 1.5 1.9 9.0 Losses due to electrical outages (% of annual sales) 0.5 0.5 0.4 0.6 1.1 2.1 Days to obtain an electrical connection (upon application) 35.4 28.6 46.2 20.2 24.4 25.3 Number of water insufficiencies in a typical month* 4.9 6.5 4.9 1.5 0.5 0.8 Trade Days to clear direct exports through customs 2.9 2.3 3.2 3.3 8.7 6.3 Percent of firms exporting directly or indirectly (at least 1% of 16.5 11.7 20.0 58.6 14.3 12.2 sales) Days to clear imports from customs* 18.0 37.5 9.7 9.5 15.8 9.1 Percent of firms using material inputs and/or supplies of foreign 67.9 57.4 72.1 90.5 66.2 35.8 origin* Finance Percent of firms with a checking or savings account 83.6 79.2 93.5 97.2 83.3 74.9 Percent of firms with a bank loan/line of credit 40.2 29.8 60.9 79.2 46.3 25.0 Proportion of investment financed internally (%) 62.3 63.4 65.1 54.2 58.7 71.0 Proportion of investment financed by banks (%) 20.0 10.7 29.4 37.4 18.4 14.6 Proportion of investment financed by supplier credit (%) 11.3 15.5 4.9 6.5 11.1 2.9 Proportion of investment financed by equity or stock sales (%) 0.5 0.1 0.5 1.6 5.0 5.7 Crime Security costs (% of annual sales) 3.2 3.2 3.2 2.5 1.3 1.3 Losses due to theft and vandalism against the firm (% of annual 0.8 0.6 1.2 0.7 0.9 0.3 sales) Informality Percent of firms competing against unregistered or informal firms 67.7 71.4 59.0 58.5 66.1 52.0 11 Latin Lower El Small Medium Large America & middle Salvador2016 firms firms firms Caribbean income Percent of firms formally registered when they started 83.3 79.4 93.4 89.8 87.8 83.0 operations in the country Regulations and Taxes Senior management time spent dealing with the requirements of 11.2 9.7 15.9 12.2 15.0 4.0 government regulation (%) Number of visits or required meetings with tax officials 0.9 0.6 1.4 1.7 1.5 1.0 Days to obtain an import license 10.6 9.0 11.2 17.2 26.6 18.2 Days to obtain a construction-related permit 98.0 39.1 179.3 110.9 69.3 33.3 Days to obtain an operating license 30.9 23.9 36.2 64.9 53.6 22.3 Corruption Bribery incidence (percent of firms experiencing at least one 4.2 1.0 12.4 3.1 10.4 24.2 bribe payment request) Percent of firms expected to give gifts to get a construction 9.4 0.3 26.7 5.3 12.2 35.2 permit Percent of firms expected to give gifts to secure government 15.2 14.4 18.5 12.5 28.2 38.6 contract Percent of firms expected to give gifts in meetings with tax 0.7 0.0 1.6 2.7 6.3 17.9 officials Biggest Obstacle Access to finance 5.4 3.2 13.4 0.4 13.6 11.6 Access to land 0.1 0.1 0.1 0.0 1.5 3.8 Business licenses and permits 4.3 2.7 7.2 11.8 4.8 3.4 Corruption 3.9 4.3 2.7 3.7 7.9 11.0 Courts 0.5 0.7 0.0 0.0 0.8 1.1 Crime, theft and disorder 28.6 29.9 25.8 25.5 10.5 2.9 Customs and trade regulations 4.6 5.4 2.2 4.4 2.0 3.1 Electricity 1.3 0.9 2.2 2.9 6.2 9.5 Inadequately educated workforce 3.9 3.5 3.5 11.0 8.9 4.3 Labor regulations 0.5 0.0 1.9 0.4 6.0 3.2 Political instability 16.6 15.4 19.6 18.6 7.8 12.3 Practices of the informal sector 18.8 23.2 8.6 7.3 16.5 17.1 Tax administration 0.9 0.1 2.5 4.1 1.7 2.8 Tax rates 10.0 10.6 8.0 9.8 10.3 10.8 Transportation 0.6 0.0 2.2 0.2 1.6 3.1 * These indicators are computed only for the manufacturing sector 1. The sample for each economy is stratified by industry, firm size, and geographic region. The level of detail of the stratification by industry depends on the size of the economy. Stratification by size follows the three levels presented in the text: small, medium, and large. Regional stratification includes the main economic regions in each economy. Through this methodology estimates for the different stratification levels can be calculated on a separate basis while, at the same time, inferences can be made for the non-agricultural private economy as a whole. For more details on the sampling strategy, review the Sampling Note available at www.enterprisesurveys.org. 12