Business Environment and Firm Entry: Evidence from International Data

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. The consequences of more restrictive entry barriers are seen, not in young firms, but in older firms, who grow more slowly and to a smaller size. Thus the absence of the disciplining effect of entry has real adverse effects. 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. However, not all regulations inhibit entry. 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: Entry, Regulations

JEL Classification: K20, L50