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Business Environment and Firm Entry: Evidence from International Data
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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 though we also examine the effects of a
developed financial sector, a well-trained labor force, strong enforcement of intellectual
property rights, and strict labor laws. We find entry regulations hamper entry, especially
in industries that naturally should have high entry. We find that naturally “high entry”
industries grow less, have lower profitability, and account for a lower share of the
economy in countries with onerous regulations on entry. This suggests entry regulations
are neither benign nor welfare improving. We also find less entry into labor-intensive
industries in countries with labor regulations that restrict the ability to fire workers. We
do not imply 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. Finally, other aspects of the environment also do matter: for
instance, the general availability of skilled labor enhances entry in industries that require
skilled labor.
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Business Environment and Firm Entry: Evidence from International Data
Entrepreneurship
English
2003
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