The relationship between business regulation and nascent and young business entrepreneurship revisited

Abstract

We empirically examine the relationship between business regulation and total (i.e., formal and informal) entrepreneurship using a unique panel data set. We estimate separate regressions for opportunity-driven and necessity-driven nascent entrepreneurship as well as young business entrepreneurship based on two different estimation methods (pooled OLS and system GMM). Our results show that business regulation generally rather hinders entrepreneurship. If we additionally consider the development stage of countries, we find different results for high-income and lower-income countries: first, we surprisingly find that stricter employment protection legislation positively affects entrepreneurship in lower-income countries where the informal sector is larger. This might be because more rigid employment laws make waged employment less attractive to employers, who thus push employees into dependent or informal self-employment. Second, we find that stricter insolvency regulation hinders entrepreneurship only in high-income economies. In lower-income economies, where there are more unregistered businesses, insolvency laws might be more difficult to enforce, so entrepreneurship rates are less affected. Third, we find that government intervention in the form of high-quality governmental support programs stimulates opportunity nascent and young business entrepreneurship. This relationship is apparent only in high-income countries, where the formal sector is larger, as such programs typically address formal rather than informal entrepreneurs. Governmental support programs may thus reach the goal of facilitating entrepreneurship only in high-income economies.

Plain English Summary

How does regulation affect entrepreneurship? Entrepreneurial activity is seen as a major driver of economic growth, as it turns knowledge into economic output. This justifies the interest of policy makers around the world in promoting entrepreneurship. While the United States, well-known for their entrepreneurial spirit, have achieved global dominance in the innovation-driven information and communication technology industry, Western European nations failed to catch up in terms of new business creation. This may be due to the different approaches in terms of new business regulations. Nevertheless, our study suggests that a combination of both the low regulation route pursued by the United States and the high support route favored in Continental Europe may best promote the creation of new firms. However, the impact of regulatory measures depends on the development stage of countries and thus on the size of the formal and informal sector. The simultaneous deregulation of firm entry and provision of government support programs might be most fruitful to facilitate entrepreneurial activity, particularly in highly developed economies. However, policy makers in developing economies should consider that some measures, such as improving the labor market regulation, may push people into informal entrepreneurship, which might not be desirable from the policy maker’s perspective.

Appendix

Table 13

Table 13 List of countries