Conventional wisdom holds that high levels of government regulation drive down entrepreneurial activity by creating unnecessary barriers to market entry. Some scholars go so far as to suggest that regulation is “antithetical” to entrepreneurship.
However, new research by Audretsch, Belitski and Desai offers a more nuanced view of the relationship between regulation and entrepreneurship. The study, which analyzed data from 228 cities in 20 European countries, shows that there are optimal levels of regulation related to market entry and contract enforcement. The study measured both the number of procedures and the costs of of four types of regulation: entry regulation, property registration, tax regulation, and contract enforcement regulation. Here are four key findings:
- Some types of regulation support entrepreneurial activity. A greater number of entry procedures, or costs associated with incorporating a company, were correlated with increased levels of company formation up to a certain level. Similar results were found for costs and procedures related to contract enforcement. However, after a certain point, increasing these types of regulation results in decreased entrepreneurial activity. This suggests that there is an optimal level for these types of national business regulation.
- Other types of regulation are harmful for budding entrepreneurs. Increased taxes and property registration requirements led to a decrease in rates of company formation over time, in line with conventional thinking on regulation and entrepreneurship. Unlike entry procedures, high entry costs were also associated with fewer companies founded over time.
- The complexity of regulation is a greater obstacle than its costs or fees. An increase in the number of procedures needed to comply with regulations had a stronger negative impact on entrepreneurship than increasing the cost of regulation, i.e. increasing regulatory fees.
- National business regulations and local conditions matter. Local conditions including a city’s industry mix, transportation infrastructure, and rates of employment in service sectors had a positive effect on the number of firms formed per city. However, the majority of variation in entrepreneurial activity per city was explained by national-level regulations. This suggests that policymakers should consider national-level policy when formulating strategies to increase entrepreneurship, which often aim to effect change exclusively at the city level.
These findings show that not all regulation is bad for business: policymakers have an important role to play in creating an optimal environment for successful entrepreneurs. To stimulate entrepreneurship, regulators should aim to identify and implement the optimal level of market entry procedures, contract enforcement procedures, and contract enforcement costs for their specific national context, while minimizing taxes, property registration, and entry costs.
The original article can be accessed here.
Contributed by Liliana Harrington