The Impact of Regulations and Institutional Quality on Entrepreneurship

Abstract

This paper examines the impact of start-up 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 the number of steps required to start a new business by one step reduces entrepreneurial activity by approximately 9.7 percent. Furthermore, three measures of institutional quality (i.e., political stability, regulatory quality, and voice and accountability) are shown to promote entrepreneurship, whereby an increase of one standard deviation in these measures increases new business activity by 30 percent to 52 percent.

Keywords: regulation, governance, institutions, entrepreneurship, barriers to entry, small businesses

JEL Classification: C23, D73, L26, L51