Research on Starting a Business

Doing Business considers the following list of papers as relevant for research on regulations affecting the entry of new firms. Some papers—denoted with an asterisk (*)—use Doing Business data for their empirical analysis. If we've missed any important research, please let us know.

A Structural Econometric Analysis of the Informal Sector Heterogeneity

Author(s): 

Pierre Nguimkeu


Journal: 

Journal of Development Economics


Abstract: 

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.

Can Entrepreneurial Activity be Taught? Quasi-Experimental Evidence from Central America

Author(s): 

Herrendorf, Berthold; Teixeira, Arilton


Journal: 

International Economic Review, Volume 52, Issue 2, Pages 573–602, May 2011


Abstract: 

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.

Barriers to Entry and Development

Author(s): 

Berthold Herrendorf, Arilton Teixeira


Journal: 

International Economic Review, Volume 52, Issue 2, Pages 573–602, May 2011


Abstract: 

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.

Coming out of the Shadows? Estimating the Impact of Bureaucracy Simplification and Tax cut on Formality in Brazilian Microenterprises

Author(s): 

Monteiro, Joana C. M.; Assuncao, Juliano J.


Journal: 

Journal of Development Economics,  Volume: 99   Issue: 1   Pages: 105-115, SEP 2012


Abstract: 

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 Portugal

Author(s): 

Branstetter, Lee; Lima, Francisco ; Taylor, Lowell J.; Ven^ancio, Ana


Journal: 

The economic journal, Jul 2013


Abstract: 

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.

Entrepreneurship policy and globalization

Author(s): 

Pehr-Johan Norbäck, Lars Persson, Robin Douhan


Journal: 

Journal of Development Economics


Abstract: 

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.

Corruption and firm growth: Evidence from China

Author(s): 

Wang, Yuanyuan; You, Jing


Journal: 

China Economic Review, Volume 23, Issue 2, Pages 415–433, June 2012


Abstract: 

Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry

Author(s): 

Marianne Bertrand and Francis Kramarz


Journal: 

Quarterly Journal of Economics 117 (4): 1369–413, 2002


Abstract: 

Are product market and entry regulation key sources of low employment growth in many European countries? We investigate this question in the context of the French retail trade industry. Since 1974, approval by regional zoning boards has been required for the creation or extension of any large retain store in France. We exploit a unique database that provides time- and region-specific variation in boards' approval decisions. We show that stronger deterrence of entry by the boards increased retailer concentration and slowed down employment growth in France.

Entrepreneurship, Start-Up Costs and Employment

Author(s): 

Raquel Fonseca, Paloma Lopez-Garcia and Christopher Pissarides


Journal: 

European Economic Review 45 (4–6): 692–705, 2001


Abstract: 

We study the effects of business start-up costs on employment, in a model with managers, workers and matching. We show that higher start-up costs discourage entrepreneurs and increase the fraction of the population who become workers. Job creation suffers and employment settles at a lower level. We illustrate with evidence from major OECD economies, where large variations in start-up costs are correlated with large variations in employment levels.

Entry Barriers in Retail Trade

Author(s): 

Schivardi, Fabiano; Viviano, Eliana


Journal: 

The Economic Journal Volume 121, Issue 551, pages 145–170, March 2011


Abstract: 

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.

Exploring Country-Level Institutional Arrangements on the Rate and Type of Entrepreneurial Activity

Author(s): 

Stenholm, Pekka; Acs, Zoltan J.; Wuebker, Robert


Journal: 

 

Journal of Business Venturing, Volume 28, Issue 1, Pages 176-193, January 2013


Abstract: 

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.

Entry Costs and Cross-Country Differences in Productivity and Output*

Author(s): 

Levon Barseghyan


Journal: 

Journal of Economic Growth, 13:145–167, 2008


Abstract: 

This paper contributes to the literature on cross-country income differences by studying the effect of entry barriers on productivity and output. Using instrumental variable regressions I show that higher entry costs significantly reduce output per worker and that they do so by lowering total factor productivity. In particular, an increase in entry costs by 80% of income per capita, which is one half of their standard deviation in my sample, is estimated to decrease total factor productivity and output per worker by 22% and 29%, respectively.

Evaluating the Effects of Entry Regulations and Firing Costs on International Income Differences

Author(s): 

Boedo, Hernan J. Moscoso; Mukoyama, Toshihiko


Journal: 

Journal of Economic Growth, Volume 17, Issue 2, 143-170, June 2012


Abstract: 

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.

Entry Regulation as a Barrier to Entrepreneurship*

Author(s): 

Leora Klapper, Luc Laeven and Raghuram Rajan


Journal: 

Journal of Financial Economics 82 (3):591-629, 2006


Abstract: 

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.

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 , Jun 2013


Abstract: 

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.

Entry Regulation and Formalization of Microenterprises in Developing Countries

Author(s): 

Bruhn, Miriam; McKenzie, David


Journal: 

The World Bank Policy Research working paper ; no. WPS 6507 Impact Evaluation series ; no. IE 94 , Jun 2013


Abstract: 

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 only in a modest increase in the number of formal firms, if at all. Less is known about the impact of other forms of business regulations on the performance of low-scale enterprises. Most informal firms appear not to benefit on net from formalizing, so ease of formalization alone will not lead to most of them formalizing. 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 trying to formalize subsistence enterprises.

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, Mar 2013


Abstract: 

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.

Greasing the Wheels? The Impact of Regulations and Corruption on Firm Entry

Author(s): 

Dreher, Axel; Gassebner, Martin


Journal: 

Public Choice, Volume 155, Issue 3, Pages 413-432, June 2013


Abstract: 

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.

Firms and Flexibility

Author(s): 

Hobijn, Bart; Sahin, Ayseguel


Journal: 

Economic Inquiry  Volume: 51   Issue: 1   Pages: 922-940, Jan 2013


Abstract: 

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).

Institutional Dimensions and Entrepreneurial Activity: An International Study

Author(s): 

David Urbano, Claudia Alvarez


Journal: 

Small Business Economics


Abstract: 

The purpose of this article is to examine the influence of institutional dimensions (regulative, normative and cultural-cognitive) on the probability of becoming an entrepreneur. The main findings demonstrate, through logistic regression, that a favourable regulative dimension (fewer procedures to start a business), normative dimension (higher media attention for new business) and cultural-cognitive dimension (better entrepreneurial skills, less fear of business failure and better knowing of entrepreneurs) increase the probability of being an entrepreneur. Data were obtained from both the Global Entrepreneurship Monitor and the International Institute for Management and Development for the year 2008, considering a sample of 30 countries and 36,525 individuals. The study advances the literature by providing new information on the environmental factors that affect entrepreneurial activity in the light of institutional economics. Also, the research could be useful for designing policies to foster entrepreneurship in different environments.

Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints*

Author(s): 

Silvia Ardagna and Annamaria Lusardi


Journal: 

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.

Financing, Regulatory Costs and Entrepreneurial Propensity*

Author(s): 

Yuen-Ping Ho and Poh-Kam Wong


Journal: 

Small Business Economics 28(2-3): 187–204, 2007


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.

Heterogeneity in the Effect of Regulation on Entrepreneurship and Entry Size

Author(s): 

Ardagna Silvia, Lusardi Annamaria


Journal: 

Journal of the European Economic Association


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.

On the Optimal Number of Representatives

Author(s): 

Auriol, Emmanuelle; Gary-Bobo, Robert J.


Journal: 

Public Choice, Volume 153, Issue 3-4, Pages 419-445, December 2012


Abstract: 

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 Economy

Author(s): 

Zhou, Wubiao


Journal: 

Journal of Business Venturing, Volume 28, Issue 2, Pages 299-315, March 201


Abstract: 

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.

Product Market Regulation and Market Work: A Benchmark Analysis

Author(s): 

Fang, Lei; Rogerson, Richard


Journal: 

 

American Economic Journal: Macroeconomics, Volume 3, Issue 2, Pages 163-88, April 2011


Abstract: 

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)

Identifying the Aggregate Productivity Effects of Entry and Size Restrictions: An Empirical Analysis of License Reform in India

Author(s): 

A. V. Chari


Journal: 

American Economic Journal: Economic Policy 3 (May 2011): 66–96


Abstract: 

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)

License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico

Author(s): 

Miriam Bruhn


Journal: 

The Review of Economics and Statistics, Vol. 93, Issue 1, Pages 382-386, February 2011


Abstract: 

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%.

Optimality of Entry Regulation under Incomplete Information

Author(s): 

Kim Jaehong


Journal: 

Hitotsubashi Journal of Economics, vol.51, Issue 2, Pages 99-113


Abstract: 

The lack of complete information of the government has been considered as a barrier to the optimal regulation, as it is well-known in price regulations literature. However, it is not true for the entry regulation: This paper shows that the performance of the entry regulation under incomplete information can be better than that under complete information. Under incomplete information, the incumbent firm would deviate from the monopoly behavior to signal itself as an efficient type and to trigger entry regulation which prevents excess entry in case that the incumbent is efficient. As a result, social welfare can be even higher than under complete information, since not only the optimal post-entry market structure is achieved as under complete information but the pre-entry price is even lower than that under complete information.

Red Tape and Delayed Entry*

Author(s): 

Antonio Ciccone and Elias Papaioannou


Journal: 

Journal of the European Economic Association 5 (2–3): 444–58, 2007


Abstract: 

Does cutting red tape foster entrepreneurship in industries with the potential to expand? We address this question by combining the time needed to comply with government entry procedures in 45 countries with industry-level data on employment growth and growth in the number of establishments during the 1980s. Our main empirical finding is that countries where it takes less time to register new businesses have seen more entry in industries that experienced expansionary global demand and technology shifts. Our estimates take into account that proxying global industry shifts using data from only one country—or group of countries with similar entry regulations—will in general yield biased results.

Regulation and Growth*

Author(s): 

Siemon Djankov, Caralee McLiesh and Rita Ramalho


Journal: 

Economics Letters 92 (3): 395–401, 2006


Abstract: 

Using objective measures of business regulations in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations to the best implies a 2.3 percentage point increase in annual growth.

The Impact of Firm Entry Regulation on Long-Living Entrants

Author(s): 

Prantl, Susanne


Journal: 

Small Business Economics, Volume 39, Issue 1, Pages 61-76, July 2012


Abstract: 

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.

Regulation and Productivity Performance

Author(s): 

Nicholas Crafts


Journal: 

Oxford Review of Economic Policy 22(2), 186–202, 2006


Abstract: 

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.

The Regulation of Entry: a Survey

Author(s): 

Djankov Simeon


Journal: 

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.

The Effect of Institutional Quality on Firm Export Performance in Emerging Economies: a Contingency Model of Firm Age and Size

Author(s): 

LiPuma, Joseph A.; Newbert, Scott L.; Doh, Jonathan P.


Journal: 

Small Business Economics, Volume 40, Issue 4, Pages 817-841 , May 2013


Abstract: 

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.

Structural Unemployment and the Costs of Firm Entry and Exit*

Author(s): 

Janiak , Alexandre


Journal: 

Labour Economics Volume 23, August 2013, Pages 1–19


Abstract: 

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 Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka

Author(s): 

de Mel, Suresh; McKenzie, David; Woodruff, Christopher


Journal: 

American Economic Journal-Applied Economics  Volume: 5   Issue: 2   Pages: 122-150, Apr 2013


Abstract: 

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).

Small and Medium Enterprises Across the Globe

Author(s): 

Meghana Ayyagari, Thorsten Beck and Asli Demirguc-Kunt


Journal: 

Small Business Economics 29(4): 415-434, 2007


Abstract: 

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.

Start-Up Costs, Limited Enforcement and the Hidden Economy*

Author(s): 

Antonio Antunes and Tiago Cavalcanti


Journal: 

Review of Economics and Statistics 91(1): 20-32, 2009


Abstract: 

This paper examines how much of the difference in the size of the informal sector and in per capita income across countries can be accounted by regulation costs and enforcement of financial contracts. It constructs and solves numerically a general equilibrium model with credit constrained heterogeneous agents, occupational choices over formal and informal businesses, financial frictions and a government sector which imposes taxes and regulations on formal firms. The benefit from formalization is better access to outside finance. The quantitative exercises suggest that: (i) regulation costs and not the level of enforcement account for differences in the size of the informal sector between United States and Mediterranean Europe; (ii) for a developing country like Peru, however, contract enforcement and regulation costs are equally important in accounting for the size of the informal sector; and (iii) regulation costs and contract enforcement do not account for most of the income differences observed among countries.

The Effects of Entry on Incumbent Innovation and Productivity

Author(s): 

Philippe Aghion, Richard Blundell, Rachel Griffith, Peter Howitt and Susanne Prantl


Journal: 

Review of Economics and Statistics 91(1): 20-32, 2009


Abstract: 

How does firm entry affect innovation incentives and productivity growth in incumbent firms? Micro-data suggests that there is heterogeneity across industries—incumbents in technologically advanced industries react positively to foreign firm entry, but not in laggard industries. To explain this pattern, we introduce entry into a Schumpeterian growth model with multiple sectors which differ by their distance to the technological frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technological frontier—successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation—increased entry threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro-level productivity growth and patent panel data for the UK, and controlling for the endogeneity of entry by exploiting the large number of policy reforms undertaken during the Thatcher era.

The Regulation of Entry*

Author(s): 

Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer


Journal: 

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.

The Regulation of Entry: a Survey

Author(s): 

Djankov Simeon


Journal: 

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.

Trust, Regulation, and Market Failures

Author(s): 

Pinotti, Paolo


Journal: 

Review of Economics and Statistics Volume: 94 Issue: 3 Pages: 650-658, Aug 2012


Abstract: 

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.

The Regulation of Entry and Aggregate Productivity

Author(s): 

Poschke Markus


Journal: 

The Economic Journal, vol120, Issue:549 pg:1175 -1200, 2010


Abstract: 

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

Trade, Regulations, and Income*

Author(s): 

Caroline Freund and Bineswaree Bolaky


Journal: 

Journal of Development Economics 87(2): 309-321, 2008


Abstract: 

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.

What Causes Firms to Hide Output? The Determinants of Informality*

Author(s): 

Era Dabla-Norris, Mark Gradstein and Gabriela Inchauste


Journal: 

Journal of Development Economics 85 (1): 1–27, 2008


Abstract: 

In many developing countries, a significant part of economic activity takes place in the informal sector. Earlier work has examined the determinants of the size of the informal sector, focusing separately on factors such as tax and regulation burden, financial market development, and the quality of the legal system. We revisit this issue by using an integrated data set which contains information on all these aspects. Building on a simple analytical framework, we test the channels affecting the degree of informality. We find that the quality of the legal framework is crucially important in determining the size of the informal sector, whereas the significance of taxes, regulations, and financial constraints is reduced in the context of a well functioning legal system, consistent with the presented model. Additionally, firm size is negatively correlated with the propensity to go informal; finance constraints tend to induce informality among smaller firms but not among large firms, whereas legal obstacles induce informality among larger firms.