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 regulations hamper entry, especially in industries that naturally shoul d have entry. Also, value added per employee in naturally high entry industr ies grows more slowly in countries with onerous regulations on entry. The consequences of more restrictive 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 has real adverse effects. Interestingly, regulatory barriers have no adverse effect on in corrupt countries, only in less corrupt ones. Taken together, the evidence suggests bureaucratic 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 deve loped financial sector do lead to greater in industries that do more R&D or industries that need more external finance.