Abstract
We test two alternative perspectives on the start-up size and subsequent growth of new firms in a heavily regulated (HR) economy and a lightly regulated (LR) economy. The first argues that, in an HR economy, there will be fewer new firms, and those that do start will be larger than those in an LR economy, but they will grow more slowly. A second perspective is that regulation does not influence the scale of entrepreneurship – merely its distribution between that which is registered and that which is not registered. Using parallel datasets for HR Spain and LR Britain we find some support for both perspectives. Specifically we find that registered new firms in Britain do start smaller than in Spain and do grow faster. However, when both registered and unregistered firms are included, these differences disappear.
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Notes
For example, France has reduced the number of days taken to establish a “standard” business from 53 days in 1999 to 8 days in 2006. Spain has reduced from 82 to 47 and Italy from 62 to 13 over the same period. Greece is the only EU-15 country with high numbers of days that have not altered over this period.
We exclude unemployment for ease of exposition. For the same reason we also exclude a time dimension. In other words, current income or utilities are compared rather than expected future utility.
Here we use an Evans and Jovanovic (1989) framework in which individuals are able to estimate θ on the grounds that it provides clearer outcomes than the Jovanovic (1982) interpretation, which assumes that individuals estimate with greater accuracy their talent through being in business. See Lotti and Santarelli (2004) for an empirical testing of this approach.
We will show later that there is a strong correlation between these two measures and a wide range of other measures of regulation.
In 2004 this threshold in the UK was sales in excess of £58,000.
These size thresholds also vary according to the nature of the legislation. For example, in Britain, firms with fewer than five workers are exempt from parts of the Maternity and Parental Leave Regulations 1999, those with fewer than 21 employees are exempt from parts of the Employment Relations Act 1999, and until 2004 firms with fewer than 15 employees were exempt from the Disability Discrimination Act 1995, while those with fewer than 50 do not have to comply with the EU Directive on Informing and Consulting Employees. A full review of these exemptions is provided in Keter (2004).
It is important to note that these differences between Britain and Spain relate only to the cost of starting a business, and so may not influence the growth of a business. World Bank (2006), however, suggests that new firms in Spain face considerably more regulatory constraints than those in Britain. For example, using the 2005 data, the UK is in eighth place for OECD countries in employment regulation rigidity, whereas Spain is in last or 23rd place. A separate index shows that while it takes 25 weeks to fire a worker in the UK, it takes 68 in Spain. The UK is also the OECD country that has “best” performance in areas of legal rights and corporate governance. While we believe these differences in regulatory constraints on established businesses probably reflect the situation in the period in which our firms were trading, the World Bank (2006) study was published after our own survey was completed. It can therefore only be a proxy for regulatory differences.
World Bank (2006: 93) shows the correlation coefficients between the “ease of starting a business” measure and nine other regulatory indicators. For the 155 countries included, the correlations ranged from 0.35 to 0.55.
Although Djankov et al. (2002) refer to Great Britain, the regulatory data are derived for London, the capital and largest city of England, so the current paper will use the term “England”. Great Britain comprises England, Wales and Scotland, but not Northern Ireland.
Using the measure of new VAT registrations per 10,000 population, the rates for Tees Valley, Shropshire and Buckinghamshire in 2001 were 18, 32 and 52, respectively. The English average was 33. Equally importantly, as shown by Greene et al. (2004), while formation rates do vary with the economic cycle, Tees Valley is always low, Shropshire is always average, and Buckinghamshire is always high, over the period 1980–2001.
The area currently referred to as Tees Valley is composed primarily of the former county of Cleveland. It also includes the area of Darlington. These name changes reflect local government reorganisation.
Storey and Strange (1993) found that only 50% of the new firms were registered for VAT. Of the unregistered 50% of firms, 16% had sales below the VAT threshold and so were not required to register, 4% had sales above the limit, and the remaining 30% refused to disclose their sales.
The population of the selected areas in both countries is quite similar. The population of Valles Occidental was approximately 740,000 in 2001. The number of inhabitants in Tees Valley was 640,000 in the same year. Buckinghamshire had 480,000 inhabitants. In Shropshire this figure was 440,000. Valles Occidental has a lower GDP per head than the three English areas, reflecting national differences (in 2001 the Spanish GDP per head was $20,155 compared with $25,479 in the UK). The unemployment rate is higher in the Spanish area than in the English counties (7.1 in Valles Occidental, 5.4 in Tees Valley, 1.9 in Shropshire and 1.4 in Buckinghamshire, all in year 2001). This broadly reflects unemployment rates in each country (5.1 in the UK and 10.5 in Spain for the year 2001).
Data provided by Arauzo-Carod, Liviano-Solis, & Martin-Bofarull (2005) also show that the new firm formation rate for the region is very similar to the average for Spain.
Given the multi-stage processes necessary to identify this group of new firms, there is no single statistic that is an ideal measure of response rate. The Tees Valley results illustrate the issue. A total of 2490 “new firms” were identified from the telephone directory, and contact was attempted with 2112. Of these, 791 were ineligible on grounds of age, ownership or sector; 278 had ceased trading or moved outside the area, implying an eligible population of 1043. In total, 320 firms were interviewed. One estimate of response rate is therefore 320/1043, implying a response rate of 32%. However, a total of 336 telephone lines were either disconnected or reallocated, which is likely to be a powerful sign that the business has ceased. If these are also assumed to be dead businesses, and the denominator includes only businesses known to be eligible at the time of the survey, then the response is 320/707 or a rate of 45%. Our, highly subjective, judgement is that the real response rate is likely to be around 40% for Tees Valley. For Buckinghamshire the response rate, comparable to the Tees Valley figure of 45% is 69%, and for Shropshire the comparable figure is 75%. For Valles Occidental (the Spanish area), the comparable estimation of the response is 182/404, implying a rate of 43%.
The reason for this discrepancy is that the English survey asked about employment 1, 3 and 5 years prior to the interview, but did not ask a specific question about start-up. Where the available data corresponded with the year of start-up these data were used, but clearly it was not appropriate to use them for all cases. There were no significant differences between the 624 and 490 cases in terms of sector, age or geography. For Spain a specific question on number of employees at start-up was used.
In the Spanish sample, the firms identified as non-registered for VAT are those exempted from VAT or those that are in a special scheme (or simplified scheme) of VAT in Spain for small firms.
For space reasons, OLS results are not presented in the results section but are available from the authors upon request.
The negative binomial regression is used to estimate the model because the Poisson estimation is inappropriate due to over-dispersion. As shown in Table 3, the over-dispersion parameter α is significantly different from zero.
Brüderl and Preisendörfer (2000) find that 8% are decliners, which is virtually the same as our result. However, they find 60% of firms are statics, 7% are fast growers, and 25% are slow growers, which does differ from the findings of this paper.
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Acknowledgements
We express our thanks to the Leverhulme Foundation for their generous funding of the English element of this project (F/00 215/E). The Spanish part has been financed by the “SME Observatory” of the Institut d’Estudis Regionals i Metropolitans de Barcelona and the Departament d’Economia de l’Empresa, Universitat Autonoma de Barcelona, and has also received financial support from the Spanish Ministry of Science and Technology (Project SEC2004-07242-C03-01/ECON). The paper has benefited considerably from important comments received from Elaine Romanelli, Andre van Stel, Simon Parker and Francis Chittenden as well as participants at the 4th International Entrepreneurship Forum in Paris, the FSF group in Halmstad, Sweden, the 28th National Conference of Political and Industrial Economists in Ancona, Italy, the 8th EEA Conference in Murcia, Spain, and seminars at Technical University of Lisbon, University of Durham, University of Jonkoping and the UK Department of Trade and Industry, London. We would also like to thank Departmental Editor Anand Swaminathan and four anonymous reviewers for their constructive and detailed feedback. We, of course, are responsible for the paper.
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Accepted by Arie Y Lewin, Editor-in-Chief, 27 August 2007. This paper has been with the authors for two revisions.
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Capelleras, JL., Mole, K., Greene, F. et al. Do more heavily regulated economies have poorer performing new ventures? Evidence from Britain and Spain. J Int Bus Stud 39, 688–704 (2008). https://doi.org/10.1057/palgrave.jibs.8400340
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DOI: https://doi.org/10.1057/palgrave.jibs.8400340