The Relationship Between Entry Regulation and Nascent Entrepreneurship Revisited

Abstract

Following the seminal study by Djankov et al. (2002), several studies have confirmed that there is a positive relationship between the ease of starting up a formal business (in terms of the time and cost needed to meet legal requirements for starting an officially registered business, i.e., entry regulation) and various measures of formal entrepreneurship. However, studies linking up entry regulation with measures of total (formal + informal) entrepreneurship have been much rarer. The results of the latter studies are ambiguous, with several studies finding no significant relationship between entry regulation and the total volume of entrepreneurial activity. The present paper revisits the relationship between entry regulation and (nascent) entrepreneurship using more recent data and more sophisticated (multilevel) estimation techniques. In our sample of 246,731 individual-level observations from 66 countries covering the years 2015-2016, we find a negative relationship between country-level regulatory quality (lighter entry regulation) and total (formal + informal) individual-level nascent entrepreneurship. Further analyses show that this result is driven by the negative effect of regulatory quality on opportunity entrepreneurship in factor-driven and efficiency-driven countries. The negative relationship for these countries is consistent with a shift from (opportunity) entrepreneurship in the informal sector to wage-employment in the formal sector when regulatory quality increases. On the contrary, the impact of regulatory quality on nascent (opportunity) entrepreneurship in innovation-driven countries is positive. This positive relationship is more in line with the original Djankov et al. (2002) study, because the informal economy tends to be smaller in richer countries.