Barriers that increase the cost and time required to start a business are often seen as deterrents to economic growth and job creation. Yet, the question persists: does reducing entry regulations for entrepreneurs actually boost an economy?
A new study analyzes the relationship between entry barriers and firm creation by studying the effects of changes in Portugal’s business regulations. The results were somewhat mixed.
After deregulating entry barriers by creating “one-stop shops” for business registration, Portugal saw a 17% increase in startup creation. Most of these new companies were “marginal firms” or firms that entered because of lower entry costs. These marginal companies were typically low-tech and led by entrepreneurs who were poorly educated.
Interestingly, the marginal firms created thanks to the new policies were also less likely than others businesses to survive over the next two years. This indicates that the benefits of reducing entry regulations may not be as high as some policymakers would hope. As the paper’s authors conclude, “The social impact of entry deregulation may be limited by the quality of the firms it creates.”
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Contributed by Haley Goodman.