Do Regulatory Compliance Costs Hinder Growth among Small and Medium Enterprises in the Philippines?

Abstract

Do burdensome regulatory environments inhibit firm growth? In this paper, we analyzed the effects of regulatory compliance in terms of time and money costs on the probability that a Small and Medium Enterprise (SME) can grow. We also tested whether the relationship between regulatory compliance and firm growth is affected by firm age. Using a sample of 590 SMEs in Metro Manila, Metro Cebu, and Metro Davao in the Philippines, we found that while additional time spent on regulatory compliance decreased the probability of growth among SMEs in general, additional monetary costs in proportion to total business costs spent on regulatory compliance decreased the probability of growth among younger firms with less than five years of operations. Additionally, SMEs that were more familiar with new developments in the regulatory environment and were able to take advantage of recent technological improvements in regulatory procedures were more likely to have grown than those that were not able to take advantage of such. Our findings suggest that the government must continue to work towards easing the burden of regulation on firms, especially younger, smaller businesses whose potential as engines of economic growth and job creation is undermined by time and money costs of compliance.

Keywords: government policy and regulation, firm performance, SMEs, Philippines

JEL Classification: G18, L25