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 helping hand or the long arm of the law? Experimental evidence on what governments can do to formalize firms

    Author(s) : Gustavo Henrique de Andrade; Miriam Bruhn and David McKenzi Journal : World Bank Group, Policy Research Working Paper 6435. 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

  • Barriers to entry and development

    Author(s) : Herrendorf, Berthold; Teixeira, Arilton Journal : International Economic Review 52(2): 573-602 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.

  • Business regulations and growth

    Author(s) : Divanbeigi, Raian; Ramalho, Rita Journal : World Bank Group, Policy Research Working Paper 7299 Abstract : 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.

  • Business start-up regulations and the complementarity between foreign and domestic investment

    Author(s) : Jonathan Munemo Journal : Review of World Economics, Volume 150, Issue 4, Pages 745-761, November 2014. Abstract : 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.

  • Can entrepreneurial activity be taught? Quasi-experimental evidence from Central America

    Author(s) : Klinger, Bailey; Schuendeln, Matthias Journal : World Development, Volume 39, Issue 9, Pages 1592-1610, September 2011 Abstract : 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.

  • Corruption's Asymmetric Impacts On Firm Innovation

    Author(s) : Paunov, Caroline Journal : Journal of Development Economics , Volume 118, Pages 216-231, January 2016. Abstract : This paper documents the impacts of corruption on smaller- and larger-sized firms’ adoption of quality certificates and patents. Using firm-level data for 48 developing and emerging countries, I analyze whether corruption’s impacts are stronger on firms operating in industries that use quality certificates and patents more intensively. My results show corruption reduces the likelihood that firms in these industries obtain quality certificates. Corruption affects particularly smaller firms but has no impacts on exporters or foreign- and publicly-owned firms. While corruption does not reduce patenting, it lowers machinery investments for innovation. More reliable business environments foster firms’ adoption of quality certificates.

  • Entrepreneurship policy and globalization

    Author(s) : Pehr-Johan Norbäck, Lars Persson, Robin Douhan Journal : Journal of Development Economics , Volume 110, Pages 22-38, September 2014. 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.

  • Entry regulation and the formalization of microenterprises in developing countries

    Author(s) : Miriam Bruhn and David McKenzie Journal : World Bank Group, Research Observer, Volume 29, Issue 2, Pages 186-201. 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 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.

  • Entry regulation as a barrier to entrepreneurship

    Author(s) : Leora Klapper, Luc Laeven and Raghuram Rajan Journal : Journal of Financial Economics, Volume 82, Issue 3, December 2006, Pages 591-629. 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.

  • 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.

  • 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 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.

  • Macro-level determinants of formal entrepreneurship versus informal entrepreneurship

    Author(s) : Mai Thi Thanh Thai Journal : Journal of Business Venturing Abstract : 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

  • Product market regulation and market work: a benchmark analysis

    Author(s) : Fang, Lei; Rogerson, Richard Journal : American Economic Journal 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.

  • The Doing Business Project: How it Started: Correspondence

    Author(s) : Djankov, Simeon Journal : Journal of Economic Perspectives , Volume 30, Number 1, Pages 247-248, Winter 2016 Abstract : The Summer 2015 issue included an article by Timothy Besley on the nature and influence of the World Bank’s Doing Business report (“Law, Regulation, and the Business Climate: The Nature and Influence of the World Bank Doing Business Project,” pp. 99–120). As the manager of the World Bank team that created Doing Business, I wish to highlight the importance of academic research starting this project.

  • 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.

  • 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.

  • 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.

  • A structural econometric analysis of the informal sector heterogeneity

    Author(s) : Pierre Nguimkeu Journal :  Journal of Development Economics, Volume 107, Pages 175-191, March 2014 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.

  • Benefits of a registration policy for microenterprise performance in India

    Author(s) : Smriti Sharma Journal :  Small Business Economics, Volume 42, Issue 1, Pages 153-164, January 2014 Abstract : 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.

  • 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, September 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.

  • Do entry regulations deter entrepreneurship and job creation? Evidence from recent reforms in Portugal

    Author(s) : Branstetter, Lee; Lima, Francisco ; Taylor, Lowell J.; Venancio, Ana Journal : The Economic Journal, Volume 124, Pages 805-832, June 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.

  • Do Informal Businesses Gain From Registration and How? Panel Data Evidence from Vietnam

    Author(s) : Demenet, Axel; Razafindrakoto, Mireille; Roubaud, François Journal : World Development, Volume 84, Pages 326-341, August 2016 Abstract : This paper evaluates the impact of Household Businesses’ decision to leave the informal sector on their performance and mode of operation. It capitalizes on a unique panel dataset, result of a five-year project. Using dynamic specifications, we find a significant impact of formalization on annual value added of 20% on average. More importantly, we show that this improvement is not valid for the smallest units, and that it is made possible for the others by changing their operating conditions. Released from the constraints of informality, they can access better equipment, increase their scale of operation, and operate in a more competitive environment.

  • Economic regulations, red tape, and bureaucratic corruption in post-communist economies

    Author(s) : Dinissa Duvanova Journal : World Development, Volume 59, July 2014, Pages 298-312 Abstract : 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 context

    Author(s) : Erkko Autio, Martin Kenney, Philippe Mustar, Don Siegel, Mike Wright Journal : Research Policy, Volume 43, Issue 7, September 2014, Pages 1097-1108 Abstract : 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.

  • 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.

  • 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.

  • 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, March 2007, Volume 28, Issue 2–3, Pages 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.

  • Fire In Cairo: Authoritarian-Redistributive Social Contracts, Structural Change, And The Arab Spring

    Author(s) : Rougier, Eric Journal : World Development, Volume 78, February 2016, Pages 148-171 Abstract : Around 2011, several Middle-East and North-African (MENA) previously stable regimes have been challenged, sometimes violently, by unprecedented waves of civil protests. The so-called “Arab Springs” have generally been motivated by the growing gap between young adults’ aspirations to climb up the social ladder and the dearth of socioeconomic opportunities consecutive to the slow pace of structural change featured by the economies of the region. The present paper argues that this slow pace of structural change, measured by export sophistication and diversification, may well be the consequence of the authoritarian–redistributive social contracts that were established after the Independence and were subsequently only marginally reformed. MENA social contracts are generally described as political bargains by which socioeconomic security, based on high levels of redistribution and state control of the economy, were traded against the absence of political freedom. We show in this paper that although redistribution and political authoritarianism have an impact on structural change, by their own, their combination certainly explains the deficit of structural transformation of MENA economies. More specifically, we provide cross-sectional and dynamic-panel evidence that the positive impact of redistribution on structural change, measured by export diversification and sophistication, vanishes for the very high levels of authoritarianism characterizing the MENA region. Our results hold for different specifications of the estimated equations and of the social contract variable, as well as when endogeneity issues are addressed. The paper finally describes the political economy that sustained, over the last three decades, this combination of political authoritarianism and slow productive diversification and sophistication throughout the region, before explaining how these features could well have inhibited the political capacities and willingness of most MENA incumbent regimes to reform the social contract in a radical and timely manner.

  • 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 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.

  • Foreign bank presence and business regulations

    Author(s) : Kouretas, Georgios P.; Tsoumas, Chris Journal : Journal of Financial Stability, Volume 24, June 2016, Pages 104-116 Abstract : We examine the impact of foreign bank presence on a host countries’ business regulatory environment. We employ a panel dataset of 87 developing economies for the 1995–2013 period and measure the efficiency of business regulations using the indices from the Heritage and the Fraser datasets. Our results show that foreign bank presence exerts a positive impact on the efficiency of business regulations; however, we find no evidence in favor of a more pronounced positive effect when foreign banks originate from countries that have a more efficient business regulatory environment. Moreover, host countries’ administrative requirements and, particularly, bureaucracy costs benefit from a foreign bank presence; however, cost and time procedures to start a business do not.

  • Heterogeneity in the effect of regulation on entrepreneurship and entry size

    Author(s) : Ardagna, Silvia; Lusardi, Annamaria Journal :  Journal of the European Economic Association, MIT Press, Vol. 8(2-3), Pages 594-605, 04-05 Abstract : 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.

  • 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, Pages 66-96, May 2011 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.

  • 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%.

  • Offshore production and business cycle dynamics with heterogeneous firms

    Author(s) : Zlate, Andrei Journal : Journal of International Economics, Volume 100, May 2016, Pages 34-49 Abstract : To examine the effect of offshoring through vertical FDI on the international transmission of business cycles, I propose a two-country model in which firms endogenously choose the location of their production plants over the business cycle. Firms face a sunk cost to enter the domestic market and an additional fixed cost to produce offshore. As such, the offshoring decision depends on the firm-specific productivity and on fluctuations in the relative cost of effective labor. The model generates a procyclical pattern of offshoring and dynamics along its extensive margin that are consistent with data from Mexico’s maquiladora sector. The extensive margin enhances the procyclical response of the value added offshore to expansions in the home economy, as the number of offshoring firms mirrors the dynamics of firm entry at home. As a result, offshoring increases the movement of output across economies, in line with the empirical evidence.

  • 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 2013 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.

  • Regulation and productivity performance

    Author(s) : Nicholas Crafts Journal : Oxford Review of Economic Policy, Volume 22, Number 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.

  • Short-term impacts of formalization assistance and a bank information session on business registration and access to finance in Malawi

    Author(s) : Francisco Campos; Markus Goldstein; David McKenzie Journal : World Bank Group, Development Research Group, Policy Research Working Paper 7183 Abstract : 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, orcredit. 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 and medium enterprises across the globe

    Author(s) : Meghana Ayyagari, Thorsten Beck and Asli Demirguc-Kunt Journal :  Small Business Economics, Volume 29, Issue 4, Pages 415–434, December, 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.

  • Small business tax policy, informality, and tax evasion: Evidence from Georgia

    Author(s) : Miriam Bruhn and Jan Loeprick Journal : World Bank Group, Development Research Group, Policy Research Working Paper 7010, August 2014 Abstract : 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 Bangladesh

    Author(s) : Giacomo De Giorgi and Aminur Rahman Journal : World Bank Group, Policy Research Working Paper 6382, Impact Evaluation Series No. 86, March 2013 Abstract : 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).

  • Structural unemployment and the costs of firm entry and exit

    Author(s) : Janiak , Alexandre Journal : Labour Economics, Volume 23, Pages 1-19, August 2013 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 bankruptcy reform act of 2005 and entrepreneurial activity

    Author(s) : Paik, Yongwook Journal :  Journal of Economics and Management Strategy, Volume 22, Issue 2, Pages 259-280, Summer 2013 Abstract : 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 Lanka

    Author(s) : de Mel, Suresh; McKenzie, David; Woodruff, Christopher Journal :  American Economic Journal - Applied Economics, Volume 5, Issue 2, Pages 122-150, April 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.

  • The effect of business regulations on nascent and young business entrepreneurship

    Author(s) : Andre van Stel, David J. Storey and A. Roy Thurik Journal :  Small Business Economics, Volume 28, Issue 2-3, Pages 171-186, March 2007 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 entry and aggregate productivity

    Author(s) : Poschke Markus Journal :  The Economic Journal, Volume 120, Issue 549, Pages 1175 -1200, December 2010 Abstract : Euro area economies have lower total factor and labour productivity than the US. I argue thatdifferences in entry cost contribute to this by affecting firms technology choice. Introducing technologychoice into a standard heterogeneous-firm model, small differences in administrative entrycost can explain around one third of TFP differences. The productivity difference arises becauseentry costs reduce competition and the incentive to adopt more advanced technologies. Firmheterogeneity, technology choice and the competition channel all contribute to strengtheningresults compared to previous studies. The effects of entry costs are even larger when the labourmarket is not competitive.

  • Trade, regulations, and income

    Author(s) : Caroline Freund and Bineswaree Bolaky Journal : Journal of Development Economics, Volume 87, Issue 2, October 2008, Pages 309-321 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.

  • Trust, regulation, and market failures

    Author(s) : Pinotti, Paolo Journal :  Review of Economics and Statistics, Volume 94, Issue 3, Pages 650-658, August 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.

  • Firm Performance and Regulation 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.

  • Size Matters: Entrepreneurial Entry and Government

    Author(s) : Aidis, Ruta; Estrin, Saul; Mickiewicz, Tomasz Marek Journal : Small Business Economics, Volume 39, Issue 1, Pages 119-139, July 2012 Abstract : We explore the country-specific institutional characteristics likely to influence an individual's decision to become an entrepreneur. We focus on the size of the government, on freedom from corruption and on "market freedom" defined as a cluster of variables related to protection of property rights and regulation. We test these relationships by combining country-level institutional indicators for 47 countries with working-age population survey data taken from the Global Entrepreneurship Monitor. Our results indicate that entrepreneurial entry is inversely related to the size of the government, and more weakly to the extent of corruption. A cluster of institutional indicators representing "market freedom" is only significant in some specifications. Freedom from corruption is significantly related to entrepreneurial entry, especially when the richest countries are removed from the sample, but unlike the size of government, the results on corruption are not confirmed by country-level fixed-effects models.

  • The Effect of Business Regulations on Nascent and Young Business Entrepreneurship*

    Author(s) : André Stel, David Storey and A. Thurik Journal : Small Business Economics, Springer 28(2) 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 Impact of Business Environment Reforms on New Firm Registration

    Author(s) : Leora Klapper and Inessa Love Journal : World Bank Policy Research Working Paper 5493 Abstract : This paper uses panel data on the number of new firm registrations in 91 countries to study how the ease of registering a business and the magnitude of registration reforms affect new firm registrations. The authors find that the costs, days and procedures required to start a business are important predictors of the number of new firm registrations. However, they find that small reforms, in general less than a 40 percent reduction in procedures or 50 to 60 percent reduction in costs and days, do not have a significant effect on new registrations. They also find important synergies in multiple reforms of two or more business environment indicators. Finally, they show that countries with relatively weaker business environments prior to reforms require relatively larger reforms in order to impact the number of newly registered firms.

  • The Impact of the Financial Crisis on New Firm Registration

    Author(s) : Leora Klapper and Inessa Love Journal : Economics Letters 113(1): 1-4 Abstract : Panel data for 93 countries shows that most countries experienced a sharp drop in new firm registration during the financial crisis. The decline was more pronounced in countries with higher levels of financial development that were more affected by the crisis.