Red tape hits entrepreneurs
Entrepreneurs love to grumble about the roadblocks and delays created by bureaucrats. Government officials, they say, are slow, bumbling and concerned only about hewing to their rules and clocking out at 4.55pm.
But in a study of global entrepreneurship, Raffi Amit and Mauro Guillen, both Wharton management professors, have found that a simple, if smart, bureaucratic initiative mattered critically in determining a country’s level of entrepreneurship. Specifically, countries that created electronic business registries saw far higher levels of new business formation than those with traditional paper ones. Even the announcement that a country planned to establish an online log led to a jump in business registrations.
How could such a small change make such a big difference? “It represents the removal of red tape,” says Amit. “Red tape is the big barrier to entrepreneurial activity. It takes three months in some places to register a company as opposed to doing it in 10 minutes on a website. An electronic registry removes all the intermediaries and the need to pay bribes.”
In other words, bureaucrats are obstructionist – at least until they start operating a server.
In co-operation with two staffers from the World Bank – Leora Klapper and Juan Manuel Quesada – Amit and Guillen gathered data from 84 countries in every region of the world. Their goal was to gauge levels of entrepreneurship and, as much as possible, explain why developed countries exhibit much higher levels of entrepreneurship than others.
“One of the reasons why people at the World Bank are interested in this is that they believe one of the most effective ways to reduce poverty is to encourage entrepreneurship,” says Guillen. “The rich countries, for two or three decades after the Second World War, made many attempts to help development. Their programmes were mainly about investing in big infrastructure projects and they mostly failed.” The hope is that fostering entrepreneurship will succeed where investing in fish farms did not.
Differences in the rates of entrepreneurship around the world are stark. At one extreme, Asia produces only 1.6 businesses per thousand people, while at the other, industrialised nations create 64.2 per thousand. On top of that, new businesses continue to enter the economy at a faster rate in developed countries than in developing ones. Industrialised countries see average entry rates of more than 10 per cent a year, while developing ones see an average of about seven to 8.5 per cent.
As the scholars dug deeper, they found that the bureaucratic hurdles business people love to hate explained these regional differences.
“The fewer procedures required to start a business, the greater the number of registered firms – and the higher the entry rate,” they write.
“There is also a significant relationship between the cost of starting a business [as a percentage of gross national income] and business density and the entry rate.” Where businesses are costly to launch – in both time and money – you see fewer of them. An electronic registry helps to cure these sorts of headaches.
In many countries, registries serve as more than just public databases. They become the nexus of policies relating to entrepreneurship. “The business registry is at the frontline in the effort to assure that businesses operate transparently and within the bounds of the law,” the scholars write. “It acts as a guarantor of a solid, legal business environment by fostering transparency.” Its information can also help to shape economic policy by giving policymakers plenty of data about employment and the strengths and weaknesses of an economy. And of course, it better enables governments to levy taxes on businesses.
Guatemala, Sri Lanka and Jordan each saw about 20 per cent increases in their number of new business registrations within just a few years of implementing their electronic systems.
While the study devotes much attention to business registries, it examines other drivers and obstacles to entrepreneurship, too.
Not surprisingly, the authors find that corruption saps business formation just as surely as red tape does. In countries with corrupt governments, bribery becomes a hidden tax on entrepreneurship. “In corrupt countries, everybody in government is on the take,” Amit says. “If somebody doesn’t have the resources to provide for that, he can’t move forward with his business.”
Political turmoil, often accompanied by corruption, plays much the same role. Amit, Guillen and their co-authors use the example of Peru, which has ridden a political roller coaster since the late 1990s.
“What we see is that firm registrations are incredibly sensitive to swings in the political cycle,” Guillen notes. In years of upheaval, like 1999 when then-President Alberto Fujimori tried to overrule the constitution and stand for a third term, the number of business formations sank. But in years of stability businesses soared.
Although Amit, Guillen and their co-authors found many common themes throughout the countries they studied, they did observe a difference in the sorts of companies that entrepreneurs are starting in the developed and developing worlds.
Service businesses dominated in industrialised countries, but wholesale and retail trading outfits dominated in in developing counties.
Amit chalks the difference up to varying stages of economic maturation. In the United States and Europe, you would expect to see entrepreneurs gravitating toward the growing service sector.
Developing countries do not just lag behind that shift – China, for example, is only hitting its manufacturing heyday now – but also face obstacles to starting firms in some sectors. In much of Africa, for example, the natural-resource sector still dominates. Governments, or people closely tied to them, control those resources, limiting the opportunities for entrepreneurs to start firms aimed at exploiting the continent’s resource wealth.
(From Knowledge at Wharton, courtesy The New York Times Syndicate)
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