Do Entry Regulations Deter Entrepreneurship and Job Creation? Evidence from Recent Reforms in Portugal Lee Branstetter, Francisco Lima, Lowell J. Taylor.

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Do Entry Regulations Deter Entrepreneurship and Job Creation?

Evidence from Recent Reforms in Portugal

Lee Branstetter, Francisco Lima, Lowell J. Taylor and Ana Venâncio

Mar 30, 2011World Bank Conference - New Ideas in Business Growth

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Do burdensome entry requirements hamper the creation of new firms?

Two streams of empirical work suggest that entry barriers are associated with reduced job creation and firm formation

Time-, region and/or industry-specific variation within a country Bertrand and Kramarz (2002) Aghion et al. (2008) Chari (2007) Klapan et al. (2009) Bruhn (2008)

Cross-country comparisons Djankov, La Porta, Lopez-De-Silanes

and Shleifer (2002) Ciccone and Papaioannou (2007) Klapper, Laeven and Rajan (2006)

Difficult inference problem

None of these studies compare the characteristics of new firms created by the reform to those that emerged prior to its

implementation

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We evaluate the impact of deregulation on the quality and nature of start-ups and entrepreneurs

What effect do entry reforms have on firm and job creation?

What types of entrepreneurs are induced to enter after reform?

How well do new “marginal” firm entrants perform over time?

The social impact of deregulation is not only a function of the number of firms brought into the market but also their quality, size,

performance and longetivity.

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What we do ...

Use a unique Portuguese database

Business Registration Reform - On the Spot Firm Program

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a) different time periods (2005 -2009)a) different counties (164 one-stop shops - 44% total counties)c) applies to private firms in a broad range of industries

a) detailed information about the founder b) match founders with venture characteristics (size and survival)c) use a difference-in-differences approach to quantify the impact of entry deregulation in Portuguese counties

Develop a model to better frame the effects of deregulation reforms on several entrepreneurial outcomes

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Series10 10 20 30 40 50

Portugal provides an excellent context in which to evaluate the impact of entry deregulation

Before the Program : visit different public

agencies complete 11 procedures fill out 20 documents wait between 54 /78 days pay almost 2,000€.

After the Program: single visit to one-stop shop complete 7 procedures. finish in 1 hour pay 360€

Portugal improved its position in the international competitive rakings (moved from 113rd to 33rd position in the Doing Business Raking)

After the Program

Filling for taxesBefore the Program Obtain pre-

approvalof name

Company Registration

Business Days

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Our data comes from the Portuguese matched employer-employee dataset Matched Employer-Employee Dataset

mandatory database 227,000 firms and 2 million individuals per year period: 1986 – 2008

Institute of Registration and Notarization (IRN) opening date and location of each one-stop shop between 2005

and 2009eligible industriesfirms founded between 2000 and 2008177,595 new firms

Firm Entry, Job Creation and Size

identify at least 1 founderfounders with age 20-60

139,868 founders of 94,586 news firms

Characteristics of Firms (Start-ups Survival)

30% sample of all individuals Insert founders characteristics

5,071,627 individuals, of whom 33,958 entrepreneurs

Type of Entrepreneurs

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We explore the effect of simplifying business registration on several entrepreneurial outcomes

Dependent variable: Number of newly formed firms per 100,000 inhabitants Initial number of employees of start-ups per 100,000 inhabitants

Independent variables: Dummy variables for each month (seasonal effects) Dummy variables for each county and year Monthly index of industrial production for the country Indicator variables for program adoption

Standard errors are clustered at the county level

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The reform is associated with an increase in the number of new firms and initial employment

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We also estimate a variant of our baseline regression

Firm Entry Initial Employment

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Agriculture, construction and retail trade were the sectors that saw a larger increase in entry

Construction Firms

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A distinctive feature of our data is the ability toexamine the impact of the reform on firm survival

Dependent variable: Two-year survival rate, equalling 1 if the start-up is still operating

after two years Independent variables:

Dummy variable for each industry (2-digit level) Firm's initial size Vector founder characteristics: age, gender, education, industry

experience Indicator variables for program adoption

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Firms established after the program had two year survival rates 4 percentage points lower.

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Next, we evaluate the impact of the program on the characteristics of the entrepreneurs

Dependent variable: Probability that an individual founds a start-up in a given year

Independent variables: Dummy variable for each year Dummy variable for each county Gross domestic product for 30 NUTS (Nomenclature of Unit for

Territorial Statistics) regions Indicator variables for program adoption

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Entry regulation reform leads to an increase in the entry of “marginal entrepreneurs”

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Portugal's substantial entry deregulation resulted in... Increased Firm and Job Creation

increase in the number of start-ups and initial jobs in eligible industries by approximately 17.2% and 21.7%, respectively

By “Marginal” Entrepreneurs the increase is driven by entrepreneurs who are relatively older,

more female and less educated

Who Created Relatively Low Quality Firms start-ups created are relatively smaller, less likely to survive in

their first two years and created primarily in low-tech industries

This reform has brought benefits, but may not be the magic bullet some policymakers anticipated

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Thank You

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EXTRA SLIDES

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Our model provides a set of intuitive predictions about the effects of a reduction in entry costs

Agents can choose between: Home production , w Labor market, w Entrepreneurship, π (different

entrepreneurial ability θ)

Let follow an uniform distribution,

Increased business formation: lower entry costs, increases the fraction of entrepreneurs

Increased employment: fewer agents are in home production.

All shifts occur at the margin: smaller firms, and lower survival probabilities

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There is an increase in the number of new firms and jobs, but firm’s size and survival decreases

Statistics for the 12 month prior and after the opening of one-stop shop

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Robustness Check1 – Drop observations corresponding to one month before and after

the opening of the one-stop shop

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Robustness Check

2 – Restrict the sample to Non- Eligible Industries

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Robustness Check

3 – Restrict the sample to Highly Educated Entrepreneurs

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Robustness Check

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4 – Restrict the sample to Novice Entrepreneurs

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Robustness Check

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5 – Restrict the sample to entrepreneurs, who were previously working