Why it matters?
Aspiring entrepreneurs encounter barriers to entry while attempting to access the formal economy. Where the rules are excessively burdensome, resource-constrained entrepreneurs might not have the opportunity to turn their ideas into a business within a level playing field. Making it difficult to start a business may prevent an economy and its private sector from reaping the benefits of business formalization.
Registered companies benefit from the legal and financial services provided by courts and commercial banks, services not available to unregistered businesses. Their employees take advantage of social security protections. The economy itself benefits from positive spillovers: where formal entrepreneurship is high, job creation and economic growth also tend to be high.1 Moreover, as more businesses formalize, the tax base expands, enabling the government to spend on productivity-enhancing areas and pursue other social and economic policy objectives.
A growing body of empirical research explores the links between business entry regulation and social and economic outcomes. Evidence suggests that regulatory reforms making it easier to start a formal business are associated with increases in the number of newly registered firms and with higher levels of employment and productivity. Conversely, overly cumbersome regulation of startups is associated with high levels of corruption and informality.2 3 One analysis, using data collected from company registries in 100 economies over eight years, found that a simple business start-up process is critical for fostering formal entrepreneurship.4 Economies with cumbersome regulations and administrative procedures for starting a business are associated with fewer legally-registered firms, greater informality (a finding particularly relevant for many developing economies), a smaller tax base and more opportunities for corruption compared to economies with more efficient regulations.5
1 Fritsch, Michael, and Florian Noseleit. 2013. “Investigating the Anatomy of the Employment Effect of New Business Formation.” Cambridge Journal of Economics 37 (2): 349–77.
2 Klapper, Leora, and Inessa Love. 2011. “The Impact of Business Environment Reforms on New Firm Registration.” Policy Research Working Paper 5493, World Bank, Washington, DC.
3 Motta, Marialisa, Ana Maria Oviedo and Massimiliano Santini. 2010. “An Open Door for Firms: The Impact of Business Entry Reforms.” Viewpoint 323, World Bank Group, Washington, DC. Available at https://www.wbginvestmentclimate.org/uploads/323-Business-entry-reforms.pdf
4 Klapper, Leora, Anat Lewin and Juan Manuel Quesada Delgado. 2009. "The Impact of the Business Environment on the Business Creation Process." Policy Research Working Paper 4937, World Bank, Washington, DC.
5 Audretsch, David, Max Keilbach and Erik Lehmann. 2006. "Entrepreneurship and Economic Growth." New York: Oxford University Press.