Institutional Barriers to Business Entry in Advanced Economies

By Kosi, Tanja; Bojnec, Stefan | Journal of Business Economics and Management, April 2013 | Go to article overview

Institutional Barriers to Business Entry in Advanced Economies


Kosi, Tanja, Bojnec, Stefan, Journal of Business Economics and Management


1. Introduction

A range of studies investigates the impact of different dimensions of entrepreneurship (measured by self-employment rates, Global Entrepreneur Monitor (GEM) indices, indicators of business dynamics etc.) on economic performance. Regression analyses of the influence of business creation on economic performance mostly focus on a single country (Foster et al. 2001; Disney et al. 2003; van Stel, Suddle 2008; Fritsch, Mueller 2008; Acs, Mueller 2008). The list of suchlike cross-country studies (including Scarpetta et al. 2002 and Bartelsman et al. 2004) is rather short, which is mostly due to data limitations. Cross-country and country-specific studies together provide convincing evidence that business creation positively affects economic performance in terms of total factor and labour productivity growth, employment growth and aggregate output growth.

If entrepreneurship represents one of the sources of new jobs and economic growth, it shall not be hindered by the institutional framework. However, to guarantee a certain level of income and social security, equality and protection of health in a society, governments regulate product, labour and financial markets and impose taxes on personal income, business profits and other bases. High wages and taxes, strict employment protection legislation, strict technical standards, complicated administration procedures, inefficiency of the legal system in contract enforcement and underdevelopment of financial markets can distort entrepreneurial incentives (Lundstrom, Stevenson 2005: 253).

Empirical studies investigating the institutional and other determinants of entrepreneurship mostly measure this phenomenon by the self-employment or business ownership rate (Parker, Robson 2004; Kanniainen, Vesala 2005; Bruce, Mohsin 2006; Nystrom 2008; Dickson et al. 2008) or by one of the GEM indices (Bj0rnskov, Foss 2008; Sobel et al. 2007). The list of cross-country studies analyzing institutional determinants of business creation is rather limited. This study attempts to fill this gap by the econometric investigation of the impact of (freedom from) regulation in different institutional areas on business entry rate in 10 Organisation for Economic Co-operation and Development (OECD) countries (1) over the period 1995-2007. Different specifications of the general regression equation are estimated by the feasible generalized least squares (FGLS) approach proposed by Parks (1967). The analysis is especially relevant for economic policymakers in continental European economies with traditionally stringent labour market regulation (LMR) and product market regulation (PMR), and important roles of government in the economy.

The rest of the paper consists of five sections. Section 2 reviews empirical literature examining the determinants of business entry. Section 3 describes variables used in the regression analysis and their data sources. Section 4 presents a framework for econometric analysis and describes the estimation approach. Results for different specifications of the general regression equation are presented in Section 5. Section 6 concludes.

2. Literature review

The amount of goods, new businesses, and patents generated from a given amount of economic inputs depends on the rules of the game (i.e. institutions) under which entrepreneurs operate (Sobel 2008: 645). As institutions govern the behaviour of individuals and businesses, they are likely to appear relevant for business dynamics. We classify them in the following groups: financial sector regulation, PMR, judicial system, property rights protection legislation, LMR, and fiscal regulation.

Rajan and Zingales (2003) emphasize the importance of financial development, related to the ease of obtaining finance for a sound entrepreneurial project and the confidence with which investors anticipate an adequate return. They argue that a well-developed financial system weakens the opposition of incumbent businesses and facilitates the entry of newcomers. …

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