A Helping Hand or the Long Arm of the Law? Experimental Evidence on What Governments Can Do to Formalize FirmsAuthor(s):
Gustavo Henrique de Andrade; Miriam Bruhn and David McKenziJournal:
The World Bank Economic Review (2014): lhu008.Abstract:
Many governments have spent much of the past decade trying to extend a helping hand to informal businesses by making it easier and cheaper for them to formalize. Much less effort has been devoted to raising the costs of remaining informal, through increasing enforcement of existing regulations. This paper reports on a field experiment conducted in Belo Horizonte, Brazil, in order to test which government actions work in getting informal firms to register. Firms were randomized to a control group or one of four treatment groups: the first received information about how to formalize; the second received this information and free registration costs along with the use of an accountant for a year; the third group was assigned to receive an enforcement visit from a municipal inspector; while the fourth group was assigned to have a neighboring firm receive an enforcement visit to see if enforcement has spillovers. The analysis finds zero or negative impacts of information and free cost treatments, and a significant but small increase in formalization from inspections. Estimates of the impact of actually receiving an inspection give a 21 to 27 percentage point increase in the likelihood of formalizing. The results show most informal firms will not formalize unless forced to do so, suggesting formality offers little private benefit to them. But the tax revenue benefits to the government of bringing firms of this size into the formal system more than offset the costs of inspections.
Economic and political institutions and entry into formal and informal entrepreneurshipAuthor(s):
Erkko Autio & Kun FuJournal:
Asia Pacific Journal of Management 32.1 (2015): 67-94.Abstract:
We investigated the influence of economic and political institutions on the prevalence rate of formal and informal entrepreneurship across 18 countries in the Asia-Pacific region during the period 2001–2010. We found the quality of institutions to exercise a substantial influence on both formal and informal entrepreneurship. One standard-deviation increase in the quality of economic and political institutions could double the rates of formal entrepreneurship and halve the rates of informal entrepreneurship. The two types of institutions had a complementary effect on driving entry into formal entrepreneurship, whereas only direct effects were observed for informal entry.
Entrepreneurship and enforcement institutions: disaggregated evidence for SpainAuthor(s):
Miguel Garcı´a-Posada • Juan S. Mora-SanguinettiJournal:
European Journal of Law and Economics (2015) 40:49–74Abstract:
Entry of new firms, both in the form of entrepreneurs or corporations, fosters competition and productivity. Both the entry of firms and productivity have been low in the Spanish economy over the recent years. This paper analyzes the determinants of entry focusing on the role of the design and efficacy of enforcement institutions (the judicial system), a traditionally overlooked aspect. In order to do so, we examine disaggregated data at the local level in Spain. We find that higher judicial efficacy increases the entry rate of firms, while it has no effect on the exit rate. Crucially, that impact only occurs in the case of the entry rates of entrepreneurs, defined as self-employed, but not in the case of limited liability corporations. This finding may be explained by the fact that judicial (in)efficacy can be regarded as a fixed cost to be paid by agents that litigate. Hence, the economic activity of entrepreneurs -and specifically, their entry into the market- is expected to be more affected than that of larger firms.
Entrepreneurship and poverty reduction: A case study of Yiwu, ChinaAuthor(s):
Steven Si & Xuebao Yu & Aiqi Wu & Shouming Chen & Song Chen & Yiyi SuJournal:
Asia Pacific Journal of Management (2015) 32:119–143Abstract:
There has been a significant reduction in the number of desperately poor people in the world in recent years. A great deal of that reduction in poverty can be attributed in China. There is great potential for new insights for scholars, in looking more deeply into the Chinese experience in terms of entrepreneurship and poverty reduction. This paper employs an in-depth case study of how poverty was reduced through entrepreneurship and innovation in the eastern Chinese city of Yiwu. This study is a response to some scholars’ call for more direct examination of businesses’ involvement with the poor to shed new light on the emerging topic of the roles of business in poverty reduction. Moreover, this study reports on key factors, new insights, and experiences which have led to success in poverty reduction and contributes to theory and practice in this area.
Entrepreneurship, poverty, and Asia: Moving beyond subsistence entrepreneurshipAuthor(s):
Garry D. Bruton & David Ahlstrom & Steven SiJournal:
Asia Pacific Journal of Management, Volume 32, Issue 1, pp 1-22
Approximately 1.7 billion people in Asia live in poverty today. To date, efforts to address poverty in Asia have largely focused on subsistence entrepreneurship rather than on creating ventures that empower them to break out of poverty. That is, the mechanisms that have been used, such as microlending, generally lead entrepreneurs to create businesses providing basic life essentials rather than helping them build businesses that generate capital to improve the entrepreneur’s standard of living. This article initially reviews what we know about entrepreneurship as a solution to poverty in Asia. We then examine what we know about other major tools to address poverty in Asia. Next, we propose a research agenda on poverty in Asia. Finally, we introduce the articles in this Special Issue of the Asia Pacific Journal of Management, “Asia & Poverty: Closing the Great Divide through Entrepreneurship & Innovation,” on new approaches to entrepreneurship to help address the key issue of the alleviation of poverty.
Entry Regulation and the Formalization of Microenterprises in Developing CountriesAuthor(s):
Miriam Bruhn and David McKenzie
World Bank Research Observer 29 (2): 186–201. doi:10.1093/wbro/lku002Abstract:
The majority of microenterprises in most developing countries remain informal despite more than a decade of reforms aimed at making it easier and cheaper for them to formalize. This paper summarizes the evidence on the effects of entry reforms and related policy actions to promote firm formalization. Most of these policies result in only a modest increase in the number of formal firms, if there is any increase at all. Most informal firms appear to not benefit on net from formalizing. As a consequence, ease of formalization along will not induce most of them to become formal. Increased enforcement of rules can increase formality. Although there is a fiscal benefit of doing this with larger informal firms, it is unclear whether there is a public rationale for attempting to formalize subsistence enterprises.
Judicial efficiency and entrepreneurs’ expectations on the reliability of European legal systemsAuthor(s):
Roberto Ippoliti • Alessandro Melcarne • Giovanni B. RamelloJournal:
European Journal of Law and Economics (2015) 40:75–94Abstract:
Many theories have tried to discover the determinants of entrepreneurship while at the same time defining a policy contour for its promotion. This study advances the extant discussion by focusing on the specific relationship between national judiciaries’ performances and expectations about the reliability of the legal framework, which is an important component fostering entrepreneurial action. More precisely, by conducting an empirical investigation on a number of European countries, it assesses the role that judicial efficiency plays in reducing
endogenous uncertainty in markets.
Legal Approaches for Improvement of Business Environment in IranAuthor(s):
Seyed Hamid Hosseini1*, Ladan Foroumand2, Ebrahim Negahdari3
1. Department of Public law, Bandar Abbas Branch, Islamic Azad University, Bandar Abbas, Iran
2. Department of Public law, Varamin-Pishva Branch, Islamic Azad University, Varamin, Iran
3. Department of Economic, Bandar Abbas Branch, Islamic Azad University, Bandar Abbas, IranJournal:
Journal of Exploratory Studies in Law and Management, Vol. 2, Issue 2, 127-135, 2015Abstract:
Including tasks of government is provide the appropriate conditions and atmosphere for
business. This makes the economic boom in government is formed that there is economic,
political, cultural stability and so on. Improving the business environment required a
holistic vision. In this study legal solutions to improve the business climate in Iran is
discussed that has been in two parts: The first part explores the concepts and business
conditions and the second part examines the legal solutions to improve the business
environment using the academic index. According to the studies in this research:
International centers have introduced mainly 10 of index for the business climate.
According to them, the business environment has been studied in Iran.
Lurking in the Cities: Urbanization and the Informal EconomyAuthor(s):
Ceyhun Elgin and Cem OyvatJournal:
Structural Change and Economic Dynamics 27 (2013): 36-47Abstract:
This study investigates the empirical relationship between the level of urbanization and size of the informal economy using cross-country datasets proxying GDP and employment shares of urban informal sector. Our estimation results indicate that there is an inverted-U relationship between informality and the level of urbanization. That is, the share of the informal sector grows in the early phases of urbanization due to several pull and push factors; however, it tends to fall in the latter phases. We also show that factors like level of taxes, trade openness, and institutional quality tend to a ect the size of the informal economy.
Multiple market imperfections, firm profitability and investmentAuthor(s):
Giorgio Calcagnini • Annalisa Ferrando • Germana GiombiniJournal:
European Journal of Law and Economics (2015) 40:95–120Abstract:
This paper investigates the impact of the interaction between product, labor and financial market imperfections on firms’ investment by using a panel data of European firms over the period 1994–2008. It studies the impact of product and labor market regulations on firm investment and how it changes with the degree of financial market imperfections. Findings show that product and labor market regulations negatively affect firm investment by lowering firm profitability. The presence of more efficient financial markets increases firm investment and lowers the negative effects of market regulations.
Regulation, firm dynamics and entrepreneurshipAuthor(s):
Johan E. EklundJournal:
European Journal of Law and Economics (2015): 1-11.Abstract:
Entrepreneurship can have important positive effects linked to job creation, wealth and income generation, innovation and industry competitiveness. Scholars and policy-makers around the world have turned to the regulatory environment as a mechanism through which entrepreneurship can be encouraged, grown and its economic benefits harnessed. The effect of regulatory conditions on entrepreneurship however is not well understood, and can be nuanced given the wide range of regulatory tools and possible areas of impact. This paper serves as the introduction to a special issue, which seeks to shed some light on the relationship between regulation, firm dynamics and entrepreneurship. We identify some foundational considerations relevant to this relationship and discuss key questions, followed by a brief overview of each of the papers contained in the special issue.
Short-Term Impacts of Formalization Assistance and a Bank Information Session on Business Registration and Access to Finance in MalawiAuthor(s):
Francisco Campos; Markus Goldstein; David McKenzieJournal:
World Bank Development Research Group Policy Research Working Paper 7184Abstract:
Despite regulatory efforts designed to make it easier for firms to formalize, informality remains extremely high among firms in Sub-Saharan Africa. In most of the region, business registration in a national registry is separate from tax registration. This paper provides initial results from an experiment in Malawi that randomly allocated firms into a control group and three treatment groups: a) a group offered assistance for costless business registration; b) a group offered assistance with costless business registration and (separate) tax registration; and c) a group offered assistance for costless business registration along with an information session at a bank that ended with the offer of business bank accounts. The study finds that all three treatments had extremely large impacts on business registration, with 75 percent of those offered assistance receiving a business registration certificate. The findings offer a cost-effective way of getting firms to formalize in this dimension. However, in common with other studies, information and assistance has a limited impact on tax registration. The paper measures the short-term impacts of formalization on financial access and usage. Business registration alone has no impact for either men or women on bank account usage, savings, or
credit. However, the combination of formalization assistance and the bank information session results in significant impacts on having a business bank account, financial practices, savings, and use of complementary financial products.
Small Business Tax Policy, Informality, and Tax Evasion Evidence from GeorgiaAuthor(s):
Miriam Bruhn and Jan LoeprickJournal:
The World Bank Group Policy Research Working Paper 7010. Development Research Group Finance and Private Sector Development Team & Trade and Competitiveness Global Practice Group Business Taxation and Impact Evaluation TeamAbstract:
Using a panel of administrative data and regression discontinuity analysis, this paper examines how the introduction of preferential tax regimes for Georgian micro and small businesses in 2010 affects formal firm creation and tax compliance. The results show that the new tax regime for micro businesses increased the number of newly registered formal firms by 18–30 percent below the eligibility threshold during the first year of the reform, but not in subsequent years. The analysis does not find an effect of the new tax regime for small businesses on formal firm creation in any year. Policy makers are often concerned about abuse risks stemming from differentiated tax treatment of micro and small businesses. The analysis in this paper reveals reduced tax compliance in 2010 around the micro business eligibility threshold, but does not find significant evidence of reduced compliance by Georgian firms in later years.
The results also do not show any significant evidence of strategic sorting around the regime eligibility thresholds.
SME Registration Evidence from a Randomized Controlled Trial in BangladeshAuthor(s):
Giacomo De Giorgi and Aminur RahmanJournal:
The World Bank Group Policy Research Working Paper 6382Abstract:
Informality is pervasive in developing countries. In Bangladesh, the majority of firms are informal and as such they might not have access to prime markets, while lowering the tax base. The authors implemented an information campaign on registration, including both the step-by-step procedures and the potential benefits from registration. They find that the treatment made firms more aware of the procedures, but had no impact on actual registration. The results point toward potentially low benefits and high indirect costs of registration as the main barriers to formality (e.g. access to markets, taxation, labor and product regulations).
Tackling Enterprises Operating in the Informal Sector in Developing and Transition Economies: A Critical Evaluation of the Neo-liberal Policy ApproachAuthor(s):
Williams, Colin C.Journal:
Journal of Global Entrepreneurship Research 2.1 (2014): 9.Abstract:
Over the past decade or so, there has been widespread recognition that a large and growing proportion of the global workforce is employed in informal sector enterprises. To explain this, neo-liberals contend that enterprises operate in the informal sector due to high taxes, public sector corruption and too much state interference in the free market and that the remedy is therefore to reduce taxes, public sector corruption and the regulatory burden via minimal state intervention. To evaluate critically this neo-liberal policy approach, this paper explores whether cross-national variations in the share of the workforce in informal sector enterprises are associated with cross-national variations in the level of tax rates, corruption and state interference. To do this, International Labour Organisation data on the share of the workforce in informal sector enterprises in 43 developing and transition economies is compared with cross-national variations in tax rates, corruption and levels of state intervention using World Bank development indicators. The finding is that there is little or no evidence to support the neo-liberal policy approach that decreasing tax rates, public sector corruption and the regulatory burden via minimal state intervention, reduces the share of the workforce in informal sector enterprises. Instead, higher tax rates and levels of regulation and state intervention are found to be associated with lower (not higher) levels of employment in informal sector enterprise. The paper concludes by discussing the theoretical and policy implications.
Varieties of entrepreneurship: institutional drivers across entrepreneurial activity and countryAuthor(s):
Farzana Chowdhury • Siri Terjesen • David AudretschJournal:
European Journal of Law and Economics (2015) 40:121–148Abstract:
This paper adapts the approach introduced in the literature on disparate varieties of capitalism by proposing that different varieties of entrepreneurship exist. We make the case for the existence of disparate varieties of entrepreneurship by exploring and analyzing three distinct varieties of entrepreneurship that are prevalent but typically analyzed separately in the entrepreneurship literature: new firm start-up, self-employment, and early stage entrepreneurial activity. Using 5 years of data from 44 countries, we highlight the variation in both the conceptualization and the measurement of entrepreneurship across time and geographic context. Our results suggest that institutional factors influence the disparate varieties of entrepreneurship differently: property rights, freedom from corruption, and fewer start-up procedures are significantly positively related to nascent/new firm ownership. Property rights protection is significantly positively related to new firm startup; tax and regulatory burden have significant positive impacts on self-employment but significantly negatively related to new firm start-up. Our findings suggest that the disparate varieties of entrepreneurship are not at all substitutes and are related in very different ways to institutional factors.
What’s the Cost of e-Access to Legal Information? A Composite IndicatorAuthor(s):
Vallbé, Joan-Josep, and Núria CasellasJournal:
Doing Business: Past, Present, and Future of Business Regulation: McDonough School of Business, Georgetown University: February 20-21, 2014.Abstract:
There is a shared belief that e-government policies can help turning regulatory compliance less costly, thus improving the regulatory environment that surrounds economic growth. While there is a growing volume of literature assessing the economic, political, ans social benefits of a good regulatory environment, the effects of online access to legal information on both governance and the business environment have been so far unexplored. On one hand, the Doing Business indicators are produced under the assumption of full availability of information on the procedures needed to set up a business. On the other, despite the cost of regulatory information discovery looms large for businesses, institutional economics literature has not yet provided a model for these specific costs of information discovery. Therefore, the design and implementation of measures for online access to legal and regulatory information proves much needed to gain insights into the costs of information discovery and their effects on the regulatory environment for policy reform that are simply unavailable to us using current methods. This paper makes two main contributions. First, it provides a model for the costs of discovery of legal information and an empirical test of the relationship between governmental online presence and legal publication, on one hand, and the quality of the regulatory environment, on the other. Second, it shows that current measures of access to legal information are in need of improvement and presents a composite indicator to measure the costs of online access to legal information.
Business Regulations and GrowthAuthor(s):
World Bank Policy ResearchWorking PaperAbstract:
Over the past decade, there has been increased interest in improving business regulations, in part because of the increased availability of data that can inform and monitor those improvements. This paper analyzes whether these regulatory changes are linked to economic outcomes. With panel data for 10 years across more than 180 countries, the paper establishes the link between business regulations, firm creation, and growth. It is found that an improvement of 10 points in the overall measure of business regulations is linked to an increase of around 0.5 new businesses per 1,000 adults. Moreover, the results show that although small changes in the overall level of business regulations may have a negligible link to growth, moving from the lowest quartile of improvement in business regulations to the highest quartile is associated with a significant increase in annual per capita growth of around 0.8 percentage points. In addition, the results highlight the importance of sound entry and exit regulations and sound credit market regulations and court enforcement for growth.
A structural econometric analysis of the informal sector heterogeneity Author(s):
Journal of Development EconomicsAbstract:
Understanding the informal sector – that represents about 60–90% of urban employment in developing countries – has a significant importance for any strategy and policy interventions aiming to alleviate poverty and improve welfare. I formulate and estimate a model of entrepreneurial choice to address the heterogeneity in occupations and earnings observed within the informal sector. I test the implications of the model with reduced form and nonparametric techniques, and use a structural econometric approach to empirically identify occupational patterns and earnings using data from the Cameroon informal sector. The empirical validity of the structural estimates is tested and the estimated model is used in counterfactual policy simulations to show how microfinance and business training programs can strengthen the efficiency of the informal sector and substantially improve its earning potential.
Benefits of a registration policy for microenterprise performance in IndiaAuthor(s):
Small Business EconomicsAbstract:
This paper evaluates the effects of a voluntary registration policy with government authorities on financial performance of urban microenterprises in the Indian manufacturing sector. Using data from the 2006 World Bank survey of Indian microenterprises and applying the semi-parametric propensity score matching technique, we find that being registered leads to significant gains in sales per employee and value added per employee. Large gains are also noted for male-owned firms, those operating with or without paid labor and those operating outside of the owner’s home.
Business start-up regulations and the complementarity between foreign and domestic investmentAuthor(s):
Review of World EconomicsAbstract:
This paper shows that the complementarity between foreign direct investment (FDI) and domestic investment significantly depends on regulations required to start a new domestically owned business in host economies. It finds evidence that FDI crowds out domestic investment in countries with entry regulation cost above a certain level, and many of these countries are in the bottom quartile of GDP per capita. Reforms in business start-up regulations can therefore play a critical role in enhancing the complementarity between foreign and domestic investment and thereby increase entrepreneurship and economic growth in low-income countries. The analysis takes into account other significant factors which affect domestic investment such as the cost of capital, government’s economic growth track record, institutional quality, and market size.
Economic Regulations, Red Tape, and Bureaucratic Corruption in Post-Communist EconomiesAuthor(s):
Should state regulatory involvement in the economy necessarily generate corruption? While excessive regulatory burden is often treated as a cause of corruption, this paper argues otherwise. It distinguishes regulatory policy, or de jure regulatory regimes from regulatory implementation and offers a more nuanced argument about the relationship between state regulations and bureaucratic corruption. The analysis of business survey data covering 25 post-communist economies demonstrates that mechanisms of regulatory implementation, rather than heavy-handed regulatory policy, are responsible for bribery. This analysis draws attention to the theoretical distinction between different types of regulatory hurdles and their differential effects on the quality of governance.
Entrepreneurial innovation: The importance of contextAuthor(s):
Erkko Autioa, Martin Kenney, Philippe Mustard, Don Siegele, Mike WrightaJournal:
Research Policy, ElsevierAbstract:
The purpose of this article and the special issue is to improve our understanding of the theoretical, managerial, and policy implications of entrepreneurial innovation. We accomplish this objective by examining the role of context in stimulating such activity, as well as its impact on the outcomes of entrepreneurial innovation. Our analysis begins by outlining an overarching framework for entrepreneurial innovation and context. With reference to this framework we then compare the attributes of national innovation systems, entrepreneurship and entrepreneurial innovation, and categorize contextual influences on entrepreneurial innovation. We then situate the papers presented in this special issue within this framework. We conclude by outlining an agenda for additional research on this topic, focusing on the relationships between contexts and entrepreneurial innovation and then discuss policy implications, focusing on how public and private actors can meet these challenges.
Entrepreneurship policy and globalizationAuthor(s):
Pehr-Johan Norbäck, Lars Persson, Robin Douhan
Journal of Development EconomicsAbstract:
What explains the world-wide trend of pro-entrepreneurial policies? We study entrepreneurial policy in the form of entry costs in a lobbying model taking into account the conflict of interest between entrepreneurs and incumbents. It is shown that international market integration leads to more pro-entrepreneurial policies, since it is then (i) more difficult to protect domestic incumbents and (ii) pro-entrepreneurial policies make foreign entrepreneurs less aggressive. Using the World Bank Doing Business database, we find evidence that international openness is negatively correlated with the barriers to entry for new entrepreneurs, as predicted by the theory.
Macro-level determinants of formal entrepreneurship versus informal entrepreneurshipAuthor(s):
Mai Thi Thanh ThaiJournal:
Journal of Business VenturingAbstract:
Based on the eclectic theory of entrepreneurship, this article analyzes macro-level determinants of national rates of formal versus informal entrepreneurship. Our evaluation of the factors identified in this theory reveals a set of empirically-testable, higher-order determinants: economic opportunities, quality of governance, macro-level resources and abilities, performance-based culture and socially-supportive culture. The results of our analysis obtained through the PLS (partial least squares) approach to structural equation modeling contribute to the entrepreneurship literature by providing an empirically-supported model that shows how formal and informal entrepreneurship are driven differently. This model clarifies the conflicting findings in previous research about the effects of socioeconomic, institutional, and cultural factors on entrepreneurship rates across countries. Finally, by showing the effect of each determinant on formal and informal entrepreneurship, this study has important implications for policymakers as well as businesses.
Coming out of the shadows? Estimating the impact of bureaucracy simplification and tax cut on formality in Brazilian microenterprisesAuthor(s):
Monteiro, Joana C. M.; Assuncao, Juliano J.Journal:
Journal of Development Economics, Volume 99, Issue 1, Pages 105-115, September 2012Abstract:
This paper evaluates the impact of a program of bureaucracy simplification and tax reduction on formality among Brazilian microenterprises - the SIMPLES program. We document an increase of 13 percentage points in formal licensing among retail firms created after the program when compared to firms in ineligible sectors. The impact on retailers is robust to a series of tests. We find no impact on construction, transportation, services and manufacturing sectors. (C) 2011 Elsevier B.V. All rights reserved.
Do Entry Regulations Deter Entrepreneurship and Job Creation? Evidence from Recent Reforms in PortugalAuthor(s):
Branstetter, Lee; Lima, Francisco ; Taylor, Lowell J.; Ven^ancio, AnaJournal:
The Economic Journal, doi: 10.1111/ecoj.12044Abstract:
We evaluate the consequences of a recent regulatory reform in Portugal, which substantially reduced the cost of firm entry. Our analysis uses matched employer–employee data, which provide unusually rich information on the characteristics of founders and employees associated with new firms before and after the reform. We find that the short-term consequences of the reform were as one would predict with a standard economic model of entrepreneurship: the reform resulted in increased firm formation and employment, but mostly among ‘marginal firms’ that would have been most readily deterred by existing heavy entry regulations. These marginal firms were typically small, owned by relatively poorly educated entrepreneurs, and operating in low-technology sectors (agriculture, construction and retail trade). In comparison to firms that entered in the absence of the reform, these marginal firms were less likely to survive their first two years.
Exploring country-level institutional arrangements on the rate and type of entrepreneurial activity Author(s):
Stenholm, Pekka; Acs, Zoltan J.; Wuebker, RobertJournal:
Journal of Business Venturing, Volume 28, Issue 1, Pages 176-193, January 2013Abstract:
This study introduces a novel multidimensional measure of the entrepreneurial environment that reveals how differences in institutional arrangements influence both the rate and the type of entrepreneurial activity in a country. Drawing from institutional theory, the measure examines the regulatory, normative, and cognitive dimensions of entrepreneurial activity, and introduces a novel conducive dimension that measures a country's capability to support high-impact entrepreneurship. Our findings suggest that differences in institutional arrangements are associated with variance in both the rate and type of entrepreneurial activity across countries. For the formation of innovative, high-growth new ventures, the regulative environment matters very little. For high-impact entrepreneurship an institutional environment Red with new opportunities created by knowledge spillovers and the capital necessary for high-impact entrepreneurship matter most. (C) 2011 Elsevier Inc. All rights reserved.
Federal regulation and aggregate economic growth Author(s):
Dawson, John W.; Seater, John J.Journal:
Journal of Economic Growth, Volume 18, Issue 2, Pages 137-177 , June 2013Abstract:
We introduce a new time series measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it-total factor productivity (TFP), physical capital, and labor. Regulation has caused substantial reductions in the growth rates of both output and TFP and has had effects on the trends in capital and labor that vary over time in both sign and magnitude. Regulation also affects deviations about the trends in output and its factors of production, and the effects differ across dependent variables. Regulation changes the way output is produced by changing the mix of inputs. Changes in regulation offer a straightforward explanation for the productivity slowdown of the 1970s. Qualitatively and quantitatively, our results agree with those obtained from cross-section and panel measures of regulation using cross-country data.
Firm entry, trade, and welfare in Zipf's world Author(s):
di Giovanni, Julian; Levchenko, Andrei A.Journal:
Journal of International Economics, Volume 89, Issue 2, Pages 283-296, March 2013Abstract:
Firm size follows Zipf's Law, a very fat-tailed distribution that implies a few large firms account for a disproportionate share of overall economic activity. This distribution of firm size is crucial for evaluating the welfare impact of economic policies such as barriers to entry or trade liberalization. Using a multi-country model of production and trade calibrated to the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the 50 largest economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade - newly imported goods at or near the exporting cutoff - is negligible. The extensive margin of imports accounts for only about 5.2% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipfs Law, the large, infra-marginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipfs Law the gains from a reduction in fixed entry barriers are an order of magnitude larger, while the gains from a reduction in variable trade costs are an order of magnitude smaller. (C) 2012 Elsevier B.V. All rights reserved.
FIRMS AND FLEXIBILITYAuthor(s):
Hobijn, Bart; Sahin, AyseguelJournal:
Economic Inquiry, Volume 51, Issue 1, Pages 922-940, January 2013Abstract:
The United States and France have very similar labor productivity levels while there are considerable differences between the firm-size distributions and firm dynamics in the two countries. To reconcile these observations we introduce a joint model of endogenous entrepreneurship and firm-size dynamics with firing costs, unemployment benefits, entry costs, and a tax wedge between wages and labor costs. We use our model to analyze the role of these rigitidies in explaining firm dynamics and productivity patterns in the United States and France. We find that our model with all rigidities goes a long way in accounting for firm-size differentials between the United States and France while generating similar labor productivity outcomes. (JEL C78, D21, E24, J6)
Greasing the wheels? The impact of regulations and corruption on firm entryAuthor(s):
Dreher, Axel; Gassebner, MartinJournal:
Public Choice, Volume 155, Issue 3, Pages 413-432, June 2013Abstract:
This paper investigates the question of whether corruption might 'grease the wheels' of an economy. We investigate whether and to what extent the impact of regulations on entrepreneurship is dependent on corruption. We first test whether regulations robustly deter firm entry into markets. Our results show that the existence of a larger number of procedures required to start a business, as well as larger minimum capital requirements are detrimental to entrepreneurship. Second, we test whether corruption reduces the negative impact of regulations on entrepreneurship in highly regulated economies. Our empirical analysis, covering a maximum of 43 countries over the 2003-2005 period, shows that corruption facilitates firm entry in highly regulated economies. For example, the 'greasing' effect of corruption kicks in at around 50 days required to start a new business. Our results thus provide support for the 'grease the wheels' hypothesis.
On the optimal number of representativesAuthor(s):
Auriol, Emmanuelle; Gary-Bobo, Robert J.Journal:
Public Choice, Volume 153, Issue 3-4, Pages 419-445, December 2012Abstract:
We propose a normative theory of the number of representatives based on a model of a representative democracy. We derive a formula giving the number of representatives as proportional to the square root of total population. Simple tests of the formula on a sample of a 100 countries yield good results. We then discuss the appropriateness of the number of representatives in some countries. It seems that the United States has too few representatives, while France and Italy have too many. The excess number of representatives matters: it is positively correlated with indicators of red tape and barriers to entrepreneurship.
Political connections and entrepreneurial investment: Evidence from China's transition economyAuthor(s):
Journal of Business Venturing, Volume 28, Issue 2, Pages 299-315, March 2013Abstract:
Recent literature in entrepreneurship suggests that market and legal institutions matter for entrepreneurial investment. Yet, prior studies have focused on the role of formal institutions. Building on new institutional theory and political connections literature, this study aims to evaluate the role of political connections in entrepreneurial reinvestment in less developed and transition economies. The purpose of this paper is threefold. First, it aims to demonstrate systematically how political connections affect entrepreneurial reinvestment Second, it applies this relationship to a subsample group, i.e., Small and Medium Enterprises (SMEs), in order to empirically test whether political connections are more beneficial for large firms or SMEs. Third, it demonstrates that political connections substitute for, rather than complement, formal market and legal institutions. The empirical test uses a nationally representative sample of entrepreneurial firms from China's transition economy. (c) 2012 Elsevier Inc. All rights reserved.
Structural unemployment and the costs of firm entry and exit Author(s):
Janiak , AlexandreJournal:
Labour Economics, Volume 23, Pages 1–19, August 2013Abstract:
I build a large-firm model of the labor market with matching frictions and firm turnover. Firms hire both labor and capital. The model allows me to assess the impact of two regulatory frictions on unemployment: i) the administrative costs of establishing a new firm and ii) the share of capital entrepreneurs recover when exiting. These regulations explain half the unemployment gap between Continental Europe and the United States in the calibrated model. More precisely, exit regulation is responsible for the entire explained gap, with entry regulation playing no role. The degree of returns to scale and the presence of fixed capital in the model are important assumptions behind these results.
The Bankruptcy Reform Act of 2005 and Entrepreneurial ActivityAuthor(s):
Journal of Economics & Management Strategy, Volume 22, Issue 2, Pages 259-280, Summer 2013Abstract:
This paper empirically investigates the effect of the Bankruptcy Reform Act of 2005 on entrepreneurial activity. We find that this act had virtually no noticeable effect on the overall level of entrepreneurship, measured by self-employment, partly because potential entrepreneurs were more likely to seek limited liability to offset the reduction in wealth protection imposed by the new law. That is, the incorporation rate increased for small businesses after the new law was enacted. This increase emphasizes that limited liability provided by incorporation is an important strategic variable that potential entrepreneurs utilize in response to changes in personal bankruptcy law. This study implies that incorporation is an important parameter to consider in understanding the relationship between bankruptcy law and entrepreneurial activity. The policy implication of this study is that entrepreneurs do respond to changes in personal bankruptcy law, even though it is intended for consumers, so this potential side effect should be considered when designing a new law.
The Demand for, and Consequences of, Formalization among Informal Firms in Sri LankaAuthor(s):
de Mel, Suresh; McKenzie, David; Woodruff, ChristopherJournal:
American Economic Journal - Applied Economics, Volume 5, Issue 2, Pages 122-150, April 2013Abstract:
A field experiment in Sri Lanka provides informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs does not increase registration. Payments equivalent to one-half to one month (alternatively, two months) of the median firm's profits leads to registration of around one-fifth (alternatively, one-half) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms that grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state. (JEL C93, D22, L25, L26, O14)
The effect of institutional quality on firm export performance in emerging economies: a contingency model of firm age and sizeAuthor(s):
LiPuma, Joseph A.; Newbert, Scott L.; Doh, Jonathan P.Journal:
Small Business Economics, Volume 40, Issue 4, Pages 817-841 , May 2013Abstract:
It is widely accepted that countries with sound formal and informal institutions create more robust environments for firm performance. However, due to the liabilities faced by firms without available slack and/or market power, we contend that institutions are especially important for new and small firms. Unfortunately, there is little research examining the potential moderating effect of firm size or age on the relationship between institutional quality and export performance. In response, we hypothesize that institutional quality will be more important to increasing the export performance of new and small firms compared with their large, established counterparts. We test our hypotheses using data from the World Bank's World Business Environment Survey. The results of our analyses offer support for our model, although some institutional variables appear to be more important to export performance than others. We conclude by discussing the implications of our results.
The impact of firm entry regulation on long-living entrantsAuthor(s):
Small Business Economics, Volume 39, Issue 1, Pages 61-76, July 2012Abstract:
What is the impact of firm entry regulation on sustained entry into self-employment? How does firm entry regulation influence the performance of long-living entrants? In this paper, I address these questions, exploiting a natural experiment in firm entry regulation. After German reunification, East and West Germany faced different economic conditions, but fell under the same law that imposes a substantial mandatory standard on entrepreneurs who want to start a legally independent firm in one of the regulated occupations. The empirical results suggest that the entry regulation suppresses long-living entrants, not only entrants in general or transient, short-lived entrants. This effect on the number of long-living entrants is not accompanied by a counteracting effect on the performance of long-living entrants, as measured by firm size several years after entry.
TRUST, REGULATION, AND MARKET FAILURESAuthor(s):
Review of Economics and Statistics, Volume 94, Issue 3, Pages 650-658, August 2012Abstract:
Government regulation of firms is associated with more negative externalities and unofficial activity across countries. I argue that this correlation mainly reflects causality going from concerns about market failures to demand for government intervention. Using trust in others as a proxy for such concerns, I show that differences in trust explain a great deal of variation in entry regulations. Then, controlling for trust in the regression of market failures on regulation, the latter is no longer associated with worse economic outcomes. The same result is confirmed when I exploit country population as an alternative source of variation in regulation.
Barriers to Entry and DevelopmentAuthor(s):
Herrendorf, Berthold; Teixeira, AriltonJournal:
International Economic Review, Volume 52, Issue 2, Pages 573–602, May 2011Abstract:
We ask whether barriers to entry are a quantitatively important reason for the income gap between developing countries and the United States. We develop a tractable general equilibrium model that captures the effects of barriers to entry and the other main distortions typically considered in the development literature. We carry our model to the data and ask it to match the main development facts from the Penn World Table. We find that this requires large barriers to entry in developing countries, which account for about half of the income gap with the United States.
Can Entrepreneurial Activity be Taught? Quasi-Experimental Evidence from Central AmericaAuthor(s):
Klinger, Bailey; Schuendeln, MatthiasJournal:
World Development, Volume 39, Issue 9, Pages 1592–1610, September 2011Abstract:
Business training is a widely used development tool, yet little is known about its impact. We study the effects of such a business training program held in Central America. To deal with endogenous selection into the training program, we use a regression discontinuity design, exploiting the fact that a fixed number of applicants are taken into the training program based on a pre-training score. Business training significantly increases the probability that an applicant to the workshop starts a business or expands an existing business. Results also suggest gender heterogeneity as well as the presence of financial constraints. (C) 2011 Elsevier Ltd. All rights reserved.
Corruption and firm growth: Evidence from ChinaAuthor(s):
Wang, Yuanyuan; You, JingJournal:
China Economic Review, Volume 23, Issue 2, Pages 415–433, June 2012Abstract:
Corruption is one of the most pervasive obstacles to economic and social development. However, in the existing literature it appears that corruption seems to be less harmful in some countries than in others. The most striking examples are well known as the "East Asian paradox": countries displaying exceptional growth records despite having thriving corruption cultures. The aim of this paper is to explain the high corruption but fast economic growth puzzle in China by providing firm-level evidence of the relation between corruption and growth and investigating how financial development influences the former relationship. Our empirical results show that corruption is likely to contribute to firms' growth. We further highlight the substitution relationship between corruption and financial development on firm growth. This means that corruption appears not to be a vital constraint on firm growth if financial markets are underdeveloped. However, pervasive corruption deters firm growth where there are more developed financial markets. This implies that fast firm growth will not be observed until a later stage of China's development when financial markets are well-functioning and corruption is under control. Furthermore, the substitution relationship exists in the private and state-owned firms. Geographically, similar results can be seen in the Southeast and Central regions. (C) 2012 Elsevier Inc. All rights reserved.
Entry Barriers in Retail TradeAuthor(s):
Schivardi, Fabiano; Viviano, ElianaJournal:
The Economic Journal Volume 121, Issue 551, pages 145–170, March 2011Abstract:
The 1998 reform of the Italian retail trade sector delegated the regulation of entry of large stores to the regional governments. We use the local variation in regulation to determine the effects of entry barriers on sectoral performance. We address the endogeneity of entry barriers through local fixed effects and using political variables as instruments. We also control for differences in trends and for area-wide shocks. We find that entry barriers are associated with substantially larger profit margins and lower productivity of incumbent firms. Liberalising entry has a positive effect on investment in ICT, increases employment and compresses labour costs in large shops. In areas with more stringent entry regulation, lower productivity coupled with larger margins results in higher consumer prices.
Evaluating the effects of entry regulations and firing costs on international income differencesAuthor(s):
Boedo, Hernan J. Moscoso; Mukoyama, ToshihikoJournal:
Journal of Economic Growth, Volume 17, Issue 2, 143-170, June 2012Abstract:
This paper analyzes the effects of entry regulations and firing costs on cross-country differences in income and productivity. We construct a general equilibrium industry-dynamics model and quantitatively evaluate it using the cross-country data on entry costs and firing costs. Entry costs lower overall productivity in an economy by keeping low-productivity establishments in operation and making the establishment size inefficiently large. Firing costs lower productivity by reducing the reallocation of labor from low-productivity establishments to high-productivity establishments. The linear regression of the data on the model prediction accounts for 27% of the cross-sectional variation in total factor productivity. Moving the level of entry costs and firing costs from the U.S. level to that of the average of low income countries (countries with a Gross National Income below 2% of the U.S. level) reduces TFP by 27% in the model without capital, and by 34% in the model with capital and capital adjustment costs.
License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in MexicoAuthor(s):
The Review of Economics and Statistics, Vol. 93, Issue 1, Pages 382-386, February 2011Abstract:
This paper estimates the economic effects of a recent reform that simplified business entry regulation in Mexico. The reform was introduced in different municipalities at different points in time. Using microlevel data, I find that the reform increased the number of registered businesses by 5%. This increase was due to former wage earners' opening businesses. Former unregistered business owners were not more likely to register their business after the reform. The reform also increased wage employment by 2.2%. Finally, the results imply that the competition from new entrants decreased the income of incumbent businesses by 3%.
Product Market Regulation and Market Work: A Benchmark AnalysisAuthor(s):
Fang, Lei; Rogerson, RichardJournal:
American Economic Journal: Macroeconomics, Volume 3, Issue 2, Pages 163-88, April 2011Abstract:
Recent empirical work finds a negative correlation between product market regulation and aggregate employment. We examine the effect of product market regulations on hours worked in a benchmark model of time allocation. Product market regulations affect market work in effectively the same fashion as labor or consumption taxes. For product market regulations to affect aggregate market work, the key driving force is the size of income transfers associated with the regulations, and the key propagation mechanism is the labor supply elasticity. We show that industry level analysis is of little help in assessing the aggregate effects of product market regulation. (JEL E24, J22, L51)
Regulation and Productivity PerformanceAuthor(s):
Oxford Review of Economic Policy
22(2), 186–202, 2006Abstract:
The paper reviews theory and evidence on the ways in which regulation affects productivity outcomes. In a context of endogenous growth, it is argued that traditional measures of compliance costs miss the potentially most important impacts of regulation on productivity which occur through changes in incentives to invest and to innovate. Recent attempts to measure cross-country variations in the strength of product-market and employment regulation are considered and some weaknesses are highlighted. Nevertheless, consistent with endogenous growth models, there appears to be quite strong evidence that regulations which inhibit entry into product markets have an adverse effect on TFP growth in OECD countries. Although there are some discrepancies in the evidence, on most measures the UK appears lightly regulated relative to France and Germany, and this may have contributed to a reduction in the recent past in the UK's TFP gap.
Identifying the Aggregate Productivity Effects of Entry and Size Restrictions: An Empirical Analysis of License Reform in IndiaAuthor(s):
A. V. ChariJournal:
American Economic Journal: Economic Policy 3 (May 2011): 66–96
Distortions in the allocation of resources between heterogeneous producers have the potential to generate large reductions in aggregate productivity, a point that has been stressed by recent studies. There is, however, little direct empirical evidence from actual policy experiments on the magnitude of these effects. This paper proposes a simple methodology that empirically identifies the separate effects of entry and size restrictions on aggregate productivity, and uses it to analyse the impact of a policy reform in India. (JEL L11, L24, O14, O47)
Heterogeneity in the effect of regulation on entrepreneurship and entry sizeAuthor(s):
Ardagna Silvia, Lusardi AnnamariaJournal:
Journal of the European Economic AssociationAbstract:
We use cross-national harmonized micro data from a broad sample of developed and developing countries and investigate the heterogeneity of the effect of entry, contract enforcement regulation, and financial development on both the decision to become an entrepreneur and the level of employment of newly created businesses. We focus on the interaction between the level of regulation and financial development and some individual characteristics that are important determinants of entrepreneurship, such as gender, business skills, and social networks. We find that entry regulation moderates the effect of business skills, while accentuating the effect of gender, even after accounting for the level of financial development. Specifically, women are more likely to enter into entrepreneurship in countries with higher levels of entry regulation, but mainly because they cannot find better work. This effect is also more pronounced in countries that are less financially developed. Furthermore, individuals who report having business skills are less likely to enter entrepreneurship in countries with higher entry regulation. Finally, we also find that individuals who know other entrepreneurs are less likely to start large businesses in countries with higher levels of entry and contract enforcement regulation.
The Regulation of Entry and Aggregate ProductivityAuthor(s):
The Economic Journal, vol120, Issue:549 pg:1175 -1200, 2010Abstract:
Euro area economies have lower total factor and labour productivity than the US. I argue that
differences in entry cost contribute to this by affecting firms technology choice. Introducing technology
choice into a standard heterogeneous-firm model, small differences in administrative entry
cost can explain around one third of TFP differences. The productivity difference arises because
entry costs reduce competition and the incentive to adopt more advanced technologies. Firm
heterogeneity, technology choice and the competition channel all contribute to strengthening
results compared to previous studies. The effects of entry costs are even larger when the labour
market is not competitive
The Regulation of Entry: a SurveyAuthor(s):
World Bank Research Observer, Volume 24, Issue 2, Pages 183-203, August 2009 Abstract:
Simplifying entry regulation has been a popular reform since the publication of Djankov and others (2002). The inclusion of business entry indicators in the World Bank's Doing Business project has led to an acceleration in reform: in 2003-08, 193 reforms took place in 116 countries. A large academic literature has followed: 201 academic articles have used the data compiled by Djankov and others (2002) and subsequently by the World Bank. The author identifies three theories as to why some countries impose burdensome entry requirements. He also surveys the literature on the effects of making business entry easier.
Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints*Author(s):
Silvia Ardagna and Annamaria LusardiJournal:
Harvard University; Dartmouth College, Harvard Business School and NBER, 2008 Abstract:
We use a micro dataset that collects information across individuals, countries, and time to investigate the determinants of entrepreneurial activity in thirty-seven developed and developing nations. We focus both on individual characteristics and on countries’ regulatory differences. We show that individual characteristics, such as gender, age, and status in the workforce are important determinants of entrepreneurship, and we also highlight the relevance of social networks, self-assessed skills, and attitudes toward risk. Moreover, we find that regulation plays a critical role, particularly for those individuals who become entrepreneurs to pursue a business opportunity. The individual characteristics that are impacted most by regulation are those measuring working status, social network, business skills, and attitudes toward risk.
Entry regulation as a barrier to entrepreneurshipAuthor(s):
Leora Klapper, Luc Laeven and Raghuram RajanJournal:
Journal of Financial Economics
Volume 82, Issue 3, December 2006, Pages 591-629
Using a comprehensive database of European firms, we study the effect of market entry regulations on the creation of new limited-liability firms, the average size of entrants, and the growth of incumbent firms. We find that costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry. These regulations also force new entrants to be larger and cause incumbent firms in naturally high-entry industries to grow more slowly. Our results hold even when we correct for the availability of financing, the degree of protection of intellectual property, and labor regulations.
Financing, Regulatory Costs and Entrepreneurial PropensityAuthor(s):
Yuen-Ping Ho and Poh-Kam WongJournal:
Small Business Economics (2007) 28:187–204 Abstract:
In this paper, we compared the availability of different types of financing sources to address the issue of capital availability to entrepreneurial propensity and we scrutinise the influence of business costs by utilising a new composite index using data from the World Bank’s Doing Business Database. The availability of three types of financing sources was analysed: traditional debt financing, venture capital financing, and informal investments. The study’s findings show that only informal investments have statistically significant influence on entrepreneurial propensity. Regulatory business costs were found to deter opportunity driven entrepreneurship, but had no impact on necessity entrepreneurship. Data on Business Cost are obtained from the World Bank Doing Business Database (World Bank, 2004), constructed using the methodology developed by Djankov et al. (2002). The World Bank database provides details on four measures of regulatory business costs for starting new businesses: number of procedures to start a business, number of days to start a business, cost of starting a business and minimum paid up capital required to register a business. The monetary cost measures are standardised as percentages of per capita income in order to be comparable across countries.
Small and Medium Enterprises Across the GlobeAuthor(s):
Meghana Ayyagari, Thorsten Beck and Asli Demirguc-KuntJournal:
Small Business Economics, Springer Netherlands, Volume 29, Number 4 / December, 2007Abstract:
This paper analyzes the relationship between the relative size of the small and medium enterprise (SME) Sector and the business environment in 76 countries. The paper first describes a new and unique cross-country database that presents consistent and comparable information on the contribution of the SME sector to total employment in manufacturing and GDP across different countries. We then relate the importance of SMEs and the informal economy to indicators of different dimensions of the business environment. We find that several dimensions of the business environment, such as lower costs of entry and better credit information sharing are associated with a larger size of the SME sector, while higher exit costs are associated with a larger informal economy.
The Effect of Business Regulations on Nascent and Young Business EntrepreneurshipAuthor(s):
André van Stel, David J. Storey and A. Roy ThurikJournal:
Small Business Economics, Springer, vol. 28(2), pages 171-186, March. Abstract:
We examine the relationship, across 39 countries, between regulation and entrepreneurship using a new two-equation model. We find the minimum capital requirement required to start a business lowers entrepreneurship rates across countries, as do labour market regulations. However the administrative considerations of starting a business – such as the time, the cost, or the number of procedures required – are unrelated to the formation rate of either nascent or young businesses. Given the explicit link made by Djankov et al. (2002) between the speed and ease with which businesses may be established in a country and its economic performance – and the enthusiasm with which this link has been grasped by European Union policy makers – our findings imply this link needs reconsidering.
The Regulation of EntryAuthor(s):
Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei ShleiferJournal:
Quarterly Journal of Economics 117(1): 1–37, 2002 Abstract:
We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.
Trade, regulations, and incomeAuthor(s):
Caroline Freund and Bineswaree BolakyJournal:
Journal of Development Economics, Volume 87, Issue 2, October 2008, Pages 309-321Abstract:
We examine the relationship between openness and per-capita income using cross-country data from 126 countries. We find that trade leads to a higher standard of living in flexible economies, but not in rigid economies. Business regulation, especially on firm entry, is more important than financial development, higher education, or rule of law as a complementary policy to trade liberalization. Specifically, after controlling for the standard determinants of per-capita income, our results imply that a 1% increase in trade is associated with more than a one-half percent rise in per-capita income in economies that facilitate firm entry, but has no positive income effects in more rigid economies. The findings are consistent with Schumpeterian “creative destruction”, which highlights the importance of new business entry in economic performance, and with previous firm-level studies showing that the beneficial effects of trade liberalization come largely from an intra-sectoral reallocation of resources.