Regulating entrepreneurship quality and quantity

Abstract

How does regulation affect entrepreneurship outcomes? We examine the effect of two regulatory policy mechanisms—costs and procedures—on entrepreneurship quality and quantity. Based on the national systems of entrepreneurship perspective, we apply public interest and public choice theories to hypothesize how regulatory costs and regulatory procedures can affect entrepreneurship quality and quantity differently. Using a multi-level approach, we test the direction, size, and shape of these effects with data on 51,330 innovation-oriented entrepreneurs (reflecting quality) and 871,241 entrepreneurs who started new ventures (reflecting quantity) across 76 countries during 2008–2017. We find that regulatory procedures in a country often have an inverted U-shaped relationship with entrepreneurship quality, suggesting that both too few and too many procedures might be detrimental when policymakers target innovation. We find that regulatory costs tend to have negative or inverted U-shaped effects on entrepreneurship quality and quantity. Our findings show that the way regulations are administered—by imposing financial costs or administrative requirements—is a boundary condition for entrepreneurship that affects the overall quantity of entrepreneurship and the innovation-centered quality of entrepreneurship.