Business Environment and Firm Entry: Evidence from International Data
Leora F. Klapper
World Bank; World Bank - Development Research Group (DECRG)
European Central Bank (ECB); Centre for Economic Policy Research (CEPR)
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 4366
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.
Number of Pages in PDF File: 63
Keywords: Business entry, regulation
JEL Classification: G38, K20, L50, M13
Date posted: May 26, 2004
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