More Regulation, Fewer Entrepreneurs

How much does politics really matter to entrepreneurs? What policies create conditions for them to succeed—and which cause them to fail or not even try? A recent study by Silvia Ardagna of Harvard University and Annamaria Lusardi of Dartmouth College goes through the data and suggests that a high level of regulations matters a whole lot—in a bad way.

Ardagna and Lusardi looked at a massive survey (the Global Entrepreneurship Monitor) from 2001 and 2002 that measured entrepreneurial activity among 150,000 individuals in 37 countries, ranging from the United States to France to India. What makes the study especially interesting is that it distinguishes between people who start their own businesses because they want to (opportunity entrepreneurs) and people who have to work for themselves because they have no other prospects (necessity entrepreneurs).

They then compare this survey to data on how stringent various regulations in these countries are, focusing on the areas of entry (how long it takes to start a business, and how costly those procedures are), contract (how efficiently the justice system settles the commercial disputes that come up when running a business), and labor (how difficult it is to hire and fire workers).

The results maybe aren't surprising, but the breadth of the study makes them powerful nonetheless: The more stringent the regulations, the fewer new businesses will sprout up.

The following graph shows just one example. Ignore all the math at the top—the graph isn't that complicated. TEAOPP (the vertical axis) is the level of new businesses started by opportunity entrepreneurs. The horizontal axis is the amount of labor regulation. Looking at individual countries plotted on the graph, the United States would be an example of a high-entrepreneurship, low-labor-regulation country, and Taiwan would be an example of a low-entrepreneurship, high-labor-regulation country.

So obviously it's not a hard-and-fast rule that the more labor regulations, the less entrepreneurial activity—New Zealand has the most business creation but more regulation than the United States. But the general trend across the countries Ardagna and Lusardi examined is that the regulations have a negative effect, as shown by the cluster of countries that are heavy on regulation and low on entrepreneurship.

Keep in mind that not every type of policy that might restrict entrepreneurship was included in the study. The researchers did not include taxes, environmental regulations, and several other types of policies that also probably impinge on entrepreneurship.

One aspect of the study might affect the U.S. policy debate about making it easier for workers to join labor unions: The percentage of the workforce affiliated with unions was part of the labor regulation variable. In other words, more union membership in a workforce means more labor regulation, which was found to result in fewer entrepreneurs. But other aspects of labor regulation—like restrictions on hiring and firing—might have made a much bigger difference.