Skip to main content
SpringerLink
Log in

Regulations, institutional quality and entrepreneurship

  • Original Article
  • Published:
Journal of Regulatory Economics Aims and scope Submit manuscript

Abstract

This paper examines the impact of startup regulations and institutional quality on the level of new business activity in a panel of 119 countries between 2001 and 2012. We find robust evidence that new business creation is significantly lower in countries with excessive barriers to entry, a lack of high-quality governmental institutions, or both. Specifically, increasing by one, the number of steps required to start a new business, reduces entrepreneurial activity between 3 and 7%. Furthermore, a one standard deviation increase in the overall average level of institutional quality is associated with a 34% increase in new business activity.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. Note that our dependent variable is new business density while Djankov et al. (2010) focuses on the stock of limited liability firms (normalized by the working-age population).

  2. PCA proceeds by standardizing each pairwise-matched data series (i.e., demeaning each series by its sample average and normalizing the resulting values by its sample standard deviation), combining the standardized data into a single matrix and calculating the underlying eigenvalues and eigenvectors. The eigenvector associated with the largest eigenvalue represents the set of weights that maximize the variance of the weighted sum of the data series, and hence, maximizes the informational content therein. Overall, 85 percent of the collective variation in the governance measures is explained by this optimally weighted sum. Finally, we normalize the resulting eigenvector so that the component weights sum to one.

  3. While a contemporaneous increase in startup activity contributes, by construction, to current output and economic growth, prior research was not concerned with endogeneity because startup activity consists of (1) very small firms that (2) represent a tiny fraction of all formal and informal business entities. As such, output and growth, as in all models of atomistic competition, can be safely treated as given.

  4. Previous studies that utilize alternative, perception-based GEM measures of entrepreneurship use a wide array of control variables. Dreher and Gassebner (2013) find that GDP per capita, communist heritage, average income tax, secondary school enrollment, and share of tax revenue in GDP are the robust determinants of entrepreneurship. Given the differences with GEM measures of entrepreneurship, we instead adopt the covariates common to the literature on business density, as our paper is focused on this particular strand of the entrepreneurship literature.

  5. Previous studies that have also used panel data models to investigate how entrepreneurship is related to institutions and other factors include Nyström (2008) and Dreher and Gassebner (2013).

  6. This is necessary as the fixed effect already captures country-specific heterogeneity relating to beginning period economic development.

References

  • Aghion, P. (2017). Entrepreneurship and growth: Lessons from an intellectual journey. Small Business Economics, 48(1), 9–24.

    Article  Google Scholar 

  • Aghion, P., Blundell, R., Griffith, R., Howitt, P., & Prantl, S. (2009). The effects of entry on incumbent innovation and productivity. Review of Economics and Statistics, 91(1), 20–32.

    Article  Google Scholar 

  • Audretsch, D., Keilbach, M., & Lehmann, E. (2006). Entrepreneurship and economic growth. New York: Oxford University Press.

    Book  Google Scholar 

  • Auty, R. (2001). The political economy of resource-driven growth. European Economic Review, 45(4–6), 46–839.

    Google Scholar 

  • Avnimelech, G., Zelekha, Y., & Sharabi, E. (2014). The effect of corruption on entrepreneurship in developed vs. non-developed countries. International Journal of Entrepreneurial Behavior & Research, 20(3), 62–237.

    Article  Google Scholar 

  • Ayyagari, M., Demirguc-Kunt, A., & Vojislav, M. (2011). “Small vs. young firms across the world: Contribution to employment, job creation, and growth.” Policy Research Working Paper No. 5631, World Bank, Washington, DC.

  • Bailey, J. B., & Thomas, D. W. (2017). Regulating away competition: The effect of regulation on entrepreneurship and employment. Journal of Regulatory Economics, 52, 54–237.

    Article  Google Scholar 

  • Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893–921.

    Article  Google Scholar 

  • Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & Finance, 30(11), 43–2931.

    Google Scholar 

  • Bjørnskov, C., & Foss, N. (2008). Economic freedom and entrepreneurial activity: Some cross-country evidence. Public Choice, 134(3–4), 28–307.

    Google Scholar 

  • Bjørnskov, C., & Foss, N. (2013). How strategic entrepreneurship and the institutional context drive economic growth. Strategic Entrepreneurship Journal, 7(1), 50–69.

    Article  Google Scholar 

  • Black, S., & Strahan, P. (2002). Entrepreneurship and bank credit availability. Journal of Finance, 57(6), 33–2807.

    Article  Google Scholar 

  • Boettke, P., & Coyne, C. (2009). Context matters: Institutions and entrepreneurship. Foundations and Trends in Entrepreneurship, 5(3), 135–209.

    Article  Google Scholar 

  • Bowen, H., & De Clercq, D. (2008). Institutional context and the allocation of entrepreneurial effort. Journal of International Business Studies, 39(4), 67–747.

    Google Scholar 

  • Chambers, D., & Munemo, J. (2018). “Natural resource dependency and entrepreneurship: Are nations with high resource rents cursed?” Journal of International Development, forthcoming.

  • Dau, L., & Cuervo-Cazurra, A. (2014). To formalize or not to formalize: Entrepreneurship and Pro-Market Institutions. Journal of Business Venturing, 29(5), 86–668.

    Article  Google Scholar 

  • Demirguc-Kunt, A., & Levine, R. (1996). Stock market development and financial intermediaries: Stylized facts. World Bank Economic Review, 10(2), 291–321.

    Article  Google Scholar 

  • Desai, S. (2009). “Measuring entrepreneurship in developing countries.” UNU-WIDER Research Paper No. 2009/10, United Nations University World Institute for Development Economics Research.

  • Desai, M., Gompers, P., & Lerner, J. (2003). “Institutions, capital constraints and entrepreneurial firm dynamics: Evidence from Europe.” NBER Working Paper No. 10165, National Bureau of Economic Research, Cambridge, MA.

  • Djankov, S., Ganser, T., McLiesh, C., Ramalho, R., & Shleifer, A. (2010). The effect of corporate Taxes on investment and entrepreneurship. American Economic Journal: Macroeconomics, 2(3), 31–64.

    Google Scholar 

  • Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117(1), 1–37.

    Article  Google Scholar 

  • Dreher, A., & Gassebner, M. (2013). Greasing the wheels? The impact of regulations and corruption on firm entry. Public Choice, 155(3–4), 32–413.

    Google Scholar 

  • Freund, C., & Bolaky, B. (2008). Trade, regulations, and income. Journal of Development Economics, 87(2), 21–309.

    Article  Google Scholar 

  • Fritsch, M., & Noseleit, F. (2013). Investigating the anatomy of the employment effect of new business formation. Cambridge Journal of Economics, 37(2), 77–349.

    Article  Google Scholar 

  • Gelb, A. (Ed.). (1988). Oil windfalls: Blessing or curse?. Oxford: Oxford University Press.

    Google Scholar 

  • Haltiwanger, J., Jarmin, R., & Miranda, J. (2010). “Who creates jobs? Small vs. large vs. young.” Paper No. CES-WP-10-7, US Census Bureau, Center for Economic Studies.

  • Hause, J., & Du Rietz, G. (1984). Entry, industry growth, and the microdynamics of industry supply. Journal of Political Economy, 92(4), 57–733.

    Article  Google Scholar 

  • Hermes, N., & Lensink, R. (2003). Foreign direct investment, financial development and economic growth. Journal of Development Studies, 40(1), 63–142.

    Article  Google Scholar 

  • Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). “The worldwide governance indicators: Methodology and analytical issues.” Policy Research Working Paper No. 5430, World Bank, Washington DC.

  • Klapper, L., Amit, R., & Guillén, M. (2010). Entrepreneurship and Firm Formation Across Countries. In J. Lerner & A. Schoar (Eds.), International differences in entrepreneurship (pp. 129–158). Chicago: University of Chicago Press.

    Chapter  Google Scholar 

  • Klapper, L., Laeven, L., & Rajan, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82(3), 591–629.

    Article  Google Scholar 

  • Klapper, L., Lewin, A., & Delgado, J.Q. (2009). “The impact of the business environment on the business creation process.” World Bank Policy Research Working Paper 4937.

  • Klapper, L., & Love, I. (2011). The impact of the financial crisis on new firm registration. Economics Letters, 113(1), 1–4.

    Article  Google Scholar 

  • Mehlum, H., Moene, K., & Tovik, R. (2006). Cursed by resources or institutions? World Economy, 29(8), 31–1117.

    Article  Google Scholar 

  • Motta, M., Oviedo, A.M., & Santini, M. (2010). “An open door for firms: The impact of business entry reforms.” Viewpoint 323, World Bank Group, Washington, DC. Available at https://www.wbginvestmentclimate.org/uploads/323-Business-entry-reforms.pdf.

  • Naudé, W. (2010). “Promoting entrepreneurship in developing countries: Policy challenges.” UNU-WIDER Policy Brief No. 4, United Nations University World Institute for Development Economics Research.

  • North, D. (1991). Institutions. Journal of Economic Perspectives, 5(1), 97–112.

    Article  Google Scholar 

  • Nyström, K. (2008). The institutions of economic freedom and entrepreneurship: Evidence from panel data. Public Choice, 136(3–4), 82–269.

    Google Scholar 

  • Ross, M. (2001). Does oil hinder democracy? World Politics, 53(3), 61–325.

    Article  Google Scholar 

  • Stigler, G. (1971). The theory of economic regulation. Bell Journal of Economics and Management Science, 2(1), 3–21.

    Article  Google Scholar 

  • Wennekers, S., & Thurik, R. (1999). Linking entrepreneurship and economic growth. Small Business Economics, 13(1), 27–55.

    Article  Google Scholar 

  • World Bank. (2003). Doing business in 2004: Understanding regulation. Washington: World Bank and Oxford University Press.

    Book  Google Scholar 

  • Xu, L. (2011). The effects of business environments on development: Surveying new firm-level evidence. World Bank Research Observer, 26(2), 40–310.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Salisbury University, 1101 Camden Ave., Salisbury, MD, 21801, USA

    Dustin Chambers & Jonathan Munemo

Authors
  1. Dustin Chambers
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jonathan Munemo
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dustin Chambers.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Chambers, D., Munemo, J. Regulations, institutional quality and entrepreneurship. J Regul Econ 55, 46–66 (2019). https://doi.org/10.1007/s11149-019-09377-w

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11149-019-09377-w

Keywords

JEL codes

Search

Navigation