Red tape and industry dynamics: a cross-country analysis

Abstract

In this paper, we analyze the relationship between the stringency of red tape and the entry and exit rates of firms. To do so, we use a panel dataset on firm entry and exit rates, obtained from Eurostat Business Demography, covering 22 European countries and 14 manufacturing sectors observed over the period 2013–2019. We complement the information on firm dynamics with country-level data on red tape from the World Bank’s Doing Business database. Five dimensions of red tape are considered: regulations for starting a business, construction permits, procedures for getting electricity, registering property, and contract enforcement. In addition, both the cost and the time taken to complete the administrative procedures are used as metrics of red tape. Using a difference-in-difference approach à la Rajan and Zingales (1998), we find a negative effect of administrative burdens on the entry and exit rates of firms across European countries. Moreover, we find that the negative effect is more pronounced for smaller firms. Finally, the time taken to comply with bureaucratic procedures is a greater impediment to smooth entry and exit than the monetary costs associated with these administrative barriers.