Working Paper: CEPR ID: DP4366
Authors: Leora Klapper; Luc Laeven; Raghuram G. Rajan
Abstract: Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing entry. We find entry regulations hamper entry, especially in industries that naturally should have high entry. Also, value-added per employee in naturally ?high entry? industries grows more slowly in countries with onerous regulations on entry. Interestingly, regulatory entry barriers have no adverse effect on entry in corrupt countries, only in less corrupt ones. Taken together, the evidence suggests bureaucratic entry regulations are neither benign nor welfare improving. Not all regulations inhibit entry, however. In particular, regulations that enhance the enforcement of intellectual property rights or those that lead to a better developed financial sector do lead to greater entry in industries that do more R&D or industries that need more external finance.
Keywords: business entry; regulation
JEL Codes: G38; K20; L50; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher bureaucratic entry regulations (D73) | Lower rates of new firm entry (L26) |
| Higher bureaucratic entry regulations (D73) | Lower rates of new firm entry in less corrupt countries (L26) |
| Regulatory barriers (L51) | No adverse effect on entry in corrupt countries (F35) |
| Regulatory barriers (L51) | Protect incumbent firms rather than serve public interest in less corrupt countries (D73) |
| Regulations enhancing intellectual property rights (O34) | Facilitate entry in R&D intensive industries (O36) |
| Regulations improving financial sector development (G28) | Facilitate entry in R&D intensive industries (O36) |