56962
NOTE NUMBER 323
viewpoint PUBLIC POLICY FOR THE PRIVATE SECTOR
JUNE 2010
An Open Door for Firms
FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY
Marialisa Motta, The Impact of Business Entry Reforms
Ana Maria Oviedo, and
Massimiliano Santini Wo r l d B a n k G r o u p c l i e n t g ove r n m e n t s a s we l l a s d o n o r s of t e n a s k
a b o u t t h e e f f e c t s of b u s i n e s s e n t r y r e f o r m s a n d t h e p e r s i s t e n c e of
Marialisa Motta
(mmotta@worldbank.org) those effects. Four clear f indings emerge from existing research.
is manager of the World
F i r s t , m o r e f i r m s e n t e r t h e m a r ket w h e n r e g i s t r at i o n p r o c e d u r e s a n d
Bank Group's Investment
Climate Reform Advisory c o s t s a r e c u t . S e c o n d , a l a r g e p e r c e n t a g e of n ew f i r m s s u r v i ve a n d
Unit, and Massimiliano g r ow. T h i r d , n ew f i r m s i n c r e a s e c o m p et i t i o n , f o r c i n g i n c u m b e n t s t o
Santini (msantini@ifc.org)
is an economist with the b e c o m e m o r e e f f i c i e n t o r t o e x i t t h e m a r ket a n d b o o s t i n g ove r a l l
unit. Ana Maria Oviedo p r o d u c t i v i t y a n d i nve s t m e n t . F i n a l l y, e n t r y r e f o r m s h ave g r e at e r
(aoviedo@worldbank.org)
is an economist in the
i m p a c t s w h e n c o u p l e d w i t h ot h e r i nve s t m e n t c l i m at e r e f o r m s .
Human Development
Department of the World Entrepreneurs first come into contact with reg- economic activity: microeconometric analyses
Bank's Latin America and ulation when incorporating a firm. Experiences establishing direct links between entry reforms
the Caribbean Region. vary greatly. An entrepreneur in New Zealand and changes in economic activity, cross- country
can incorporate a limited liability company in econometric studies examining the average
1 day at a cost of US$112 (0.4 percent of the impact of entry barriers on economic activity,
country's gross national income [GNI] per and firm-level studies relating firm demograph-
capita). One in Equatorial Guinea would have ics to economic activity.
to spend 136 days to open the same business
and pay about US$15,000 (100 percent of GNI More firms enter the market
THE WORLD BANK GROUP
per capita). That entrepreneur would also have Research shows that entry reforms lead more
to deposit US$1,858 (12.4 percent of GNI per firms to enter the market (table 2). Country-
capita) in a bank as a minimum capital require- specific studies in Mexico (Bruhn 2008) and
ment before opening for business (World Bank Colombia (C�rdenas and Rozo 2007) assessed
2009). In more than 40 economies, starting a the impact of introducing one-stop shops on
business costs more than 50 percent of GNI per firm creation by comparing firm entry before
capita. In more than 20, it takes longer than two and after the implementation of a one-stop shop.
months (table 1). In India, Aghion and others (2008) tracked the
This Note summarizes the findings of three effects on firm registration of dismantling the
types of studies that quantify the effects of "license raj," a system of central controls on entry
reducing the time and cost of business entry on and production, by comparing industries where
AN OPEN DOOR FOR FIRMS ThE IMPACT OF buSINESS ENTRY REFORMS
Table Economies with high costs or long delays to start a business
1 Cost of more
than 50% of GNI
per capita to
start a business
Zimbabwe, Democratic Republic of Congo, Guinea-Bissau, Central African Republic, Haiti, The Gambia,
Togo, Djibouti, Comoros, Chad, Benin, Burundi, Angola, Guinea, Cambodia, Federated States of Micronesia,
C�te d'Ivoire, Cameroon, Sierra Leone, Niger, Suriname, Nicaragua, Malawi, Equatorial Guinea, Bolivia, Mali,
Republic of Congo, Uganda, Republic of Yemen, S�o Tom� and Principe, Lebanon, Nigeria, Eritrea, Iraq, India,
Senegal, Paraguay, West Bank and Gaza, Nepal, Liberia, Solomon Islands, Belize, Burkina Faso
More than Suriname, Guinea-Bissau, Haiti, Democratic Republic of Congo, S�o Tom� and Principe, Rep�blica Bolivariana
2 months de Venezuela, Equatorial Guinea, Brazil, Brunei Darussalam, Lao PDR, Zimbabwe, Cambodia, Eritrea, Timor-
to register a Leste, Iraq, Chad, Togo, Angola, Namibia, Uruguay, Ecuador, Botswana, Swaziland
business
2 More than 10 Equatorial Guinea, Chad, Brunei Darussalam, Uganda, Brazil, Guinea-Bissau, Rep�blica Bolivariana de
procedures Venezuela, Argentina, Bolivia, Greece, Philippines, Algeria, China, Democratic Republic of Congo, Ecuador,
to register a Eritrea, Guinea, Haiti, Honduras, India, Kuwait, Suriname, Swaziland, Bosnia and Herzegovina, Cameroon,
business Costa Rica, Kenya, Tajikistan, Tanzania, Montenegro, Burundi, Comoros, Djibouti, Guatemala, Iraq, Uruguay,
Vietnam, West Bank and Gaza
Source: World Bank 2009.
Note: In each category economies are listed in descending order by cost, time, or number of procedures.
Table Impact of entry reforms on the creation of new firms
2 Country
Colombia
Study
C�rdenas and Rozo 2007
Reform
Introduction of one-stop shop (CAE program)a
Increase in new
firms created (%)
5.2
India Aghion and others 2008 Elimination of license raj (reduction of procedures 6
to start a business)
Mexico Bruhn 2008 Introduction of one-stop shop (SARE program)b 5
Cross-country Fisman and Sarria-Allende 2004 Reduction of registration cost from 75th to 25th 11c
percentile in Doing Business rankings
Cross-country Klapper, Laeven, and Rajan 2006 Reduction of registration cost from 75th to 25th 10c
percentile in Doing Business rankings
a. The CAE (Centros de Atenci�n Empresarial) program introduced one-stop shops in Colombia.
b. The SARE (Sistema de Apertura R�pida de Empresas) program introduced one-stop shops in Mexico.
c. The increase in the number of firms refers to high-turnover industries relative to low-turnover industries.
the license was phased out with those where it is associated with a 10 �11 percent increase in
was maintained ("high risk" industries). the number of new firms in industries with low
Taken together, these studies show that a sub- barriers relative to those with high barriers.2
stantial reduction in the number of procedures
required to start a business--often through New firms survive and grow
the establishment of well-functioning one-stop Firm demographics studies use census data
shops--is associated with an increase in the cre- to study patterns in firm entry, growth, and
ation of new firms estimated at 5�6 percent.1 exit and the implications of those patterns for
These results are confirmed by cross- employment and productivity. 3 These studies
country studies by Fisman and Sarria-Allende do not analyze the survival and growth patterns
(2004) and Klapper, Laeven, and Rajan of firms following a reduction in the time and
(2006), where the authors used a difference- cost to register. Nevertheless, they shed impor-
in- difference methodology to compare the tant light on the fate of new entrants, including
impact of entry reforms on industries with those created after a reform reducing the time
"naturally" high barriers to entry (for example, and cost to register.
pharmaceuticals) with the impact on indus- A study by Bartelsman, Haltiwanger, and
tries with low barriers (for example, retail). Scarpetta (2004) finds that 61�87 percent of
These studies find that a reduction of registra- firms that enter the market in a given year still
tion costs from the 75th to the 25th percentile operate after two years and that 27�66 percent
in the World Bank's Doing Business rankings of the initial firms are still operating at age seven
(figure 1). Klapper and Richmond (2009) find more than 77 percent of the number of work-
similar two-year survival rates in C�te d'Ivoire. ers originally employed by all new firms in their
Surviving firms generate enough employ- cohort (figure 2).
ment to partly offset the loss from young firms Entry reforms also have a direct positive
exiting the market. In Mexico, for example, effect on employment. In the Mexico study,
about 27 percent of new firms survived seven Bruhn (2008) finds that the introduction
years after entering the market, and these sur- of one-stop shops increased employment by
viving firms employed more than 105 percent of 2.8 percent.
the number of workers originally employed by A simulation shows that in Guadalajara,
all new entrants in their cohort. Four years after Mexico, the introduction of a one-stop shop is
entering the market, approximately 68 percent associated with the creation of 5,520 new firms
of new Romanian entrants survived, employing and 18,768 new jobs one year after the reform
Figure Firm survival rates at different ages, 1990s
1
Share of cohort of entrants still operating (%) 2 years 4 years 7 years
100
75
50
25
0
o
d
ly
e
tes
y
l
ia
bia
ia
ds
y
a
nia
ga
an
ar
xic
nc
tvi
an
Ita
ton
an
lan
tu
lom
ve
ta
ng
rm
La
a
l
Me
m
Fin
Fr
Es
dS
r
Slo
er
Hu
Po
Ro
Ge
Co
th
ite
Ne
Un
Sources: Bartelsman, Haltiwanger, and Scarpetta 2004; authors' recalculation in 2009 based on original data set.
Figure Employment-based survival rates at different firm ages, 1990s
2 Employment by surviving firms as % of original employment by cohort
160
2 years 4 years 7 years
120
80
40
0
ia
d
e
nia
ly
bia
l
y
ry
o
ia
tes
a
ga
an
nc
xic
tvi
an
Ita
an
ton
a
ve
lom
tu
ta
ng
rm
La
a
l
Me
m
Fin
Fr
Es
dS
r
Slo
Hu
Po
Ro
Ge
Co
ite
Un
Source: Bartelsman, Haltiwanger, and Scarpetta 2004.
Table Simulated impact of one-stop shops on firms and employment in Guadalajara and Bogot�
3 Prereform
baseline,
2003 Number
Increase due to creation
of one-stop shop
As % of prereform
baseline
Estimated survivals after 7 years
Number
As % of
increase
Guadalajara (1.6 million inhabitants)
Firms 110,405 5,520 5.0 1,510 27
Employmenta 661,460 18,768 2.8 19,707 105
Bogot� (6.3 million inhabitants) 4
Firms 187,683 9,760 5.5 4,768 49
Employmentb 2,707,516 75,810 2.8 64,439 85
Sources: For Guadalajara, authors' calculations based on data from the municipality of Guadalajara and Bruhn (2008). For Bogot�, authors' calculations based on data
from the Departamento Administrativo Nacional de Estad�stica of Colombia and the Chamber of Commerce of Bogot� and on estimates from Bruhn (2008) and C�rdenas
and Rozo (2007). For estimated survivals after 7 years, authors' calculations based on data from Bartelsman, Haltiwanger, and Scarpetta (2004).
a. Employment data for Guadalajara refer to firm owners as well as workers.
b. Employment data for Bogot� do not include the public sector. (The estimate of the public sector share of employment was obtained from the International Labour
Organization's Labour Statistics Database.)
Table Impact of entry reforms on total factor productivity, GDP, investment, and real output
4 Country
Mexico
Study
Bruhn 2008
Reform
Introduction of one-stop
shop (SARE program)a
Impact
Decrease of 3.2% in revenue of incumbent business
owners due to increased competition from new entrants
United Aghion and others 2009 Increase in foreign firm Increase in total factor productivity of 1.4�3.1% depending
Kingdom entry rate of 11.3% on firms' level of technological development, with the
higher estimate applying to firms close to the technological
frontier
Cross-country Barseghyan 2008 Increase in entry costs of Decrease in total factor productivity of 22%
80% of GNI per capita
Decrease in GDP per worker of 29%
Cross-country Eifert 2009 Decrease of 10 days to Increase in GDP growth rate of 0.36%
start a business
Increase in investment rate of 0.3 percentage points
Cross-country Klapper, Laeven, and Reduction of registration Increase in value added per worker of 14%
Rajan 2006 cost from 75th to 25th
percentile in Doing
Business rankings
a. The SARE (Sistema de Apertura R�pida de Empresas) program introduced one-stop shops in Mexico.
(table 3). Seven years after the reform, we can that after the introduction of one-stop shops
expect 1,510 of the new entrants to still operate in Mexico, the revenue of incumbent busi-
and employ 19,707 workers. Similarly, the intro- ness owners decreased by roughly 3 percent
duction of a one-stop shop in Bogot�, Colombia, as a result of increased competition from new
is associated with the creation of 9,760 new entrants. In the United Kingdom, Aghion and
firms and 75,810 new jobs. Seven years after the others (2009) find that entry of foreign firms
reform, we can expect 4,768 of the new entrants increases the productivity of incumbent firms
to still operate and employ 64,439 workers. close to the technological frontier more than
that of less advanced firms. And in India,
New firms increase productivity, output, Aghion and others (2008) find that after the
and investment elimination of the license raj, highly productive
Firm entry increases labor productivity, output, firms (those in the top third when ranked by
and investment. The more productive new firms productivity) experience larger increases in real
are, the more pressure they put on incumbents output than less productive firms (those in the
to increase productivity. Bruhn (2008) finds bottom third). Cross-country studies show that
a 10-day reduction in the time to start a busi- Klapper, Dorsati Madani, Andrei Mikhnev, and Rita
ness is associated with a 0.3 percentage point Ramalho for their valuable inputs and comments.
increase in the investment rate and a 0.36 per- A longer version of this Note is available from the
cent increase in the GDP growth rate, and that authors upon request. Neither version attempts to
a cut in registration costs (from the 75th to the provide an exhaustive review of the literature on entry
25th percentile) is associated with a 14 percent or looks at the specific effects of entry reforms on in-
increase in value added per worker (table 4). formality. Instead, both include the findings of studies
that help address the questions whether entry reforms
Entry reforms have greater impact when have a positive impact on firm creation; whether firms
5
combined with other regulatory reforms that enter the market survive and grow; what effects
Because many regulations interact, deregu- entry reforms have on productivity, investment, and
lating several areas has synergistic effects. employment; and how persistent those effects are.
Productivity gains after entry reforms are larger For a comprehensive literature review on entry, see
in areas with more flexible labor regulations. Djankov (2009).
For example, Aghion and others (2008) find 1. While the overall findings are clear, it is important
that, following entry reforms, Indian states with to keep in mind two caveats. First, the magnitude of the
more flexible labor regulations had real output impact may not be the same in all countries. Second, it
gains 17.8 percent larger than those in states cannot be assumed that the results are linear: a reduc-
with less flexible labor regulations. Similarly, tion from 16 procedures to 8 may not have the same
Kaplan, Piedra, and Seira (2007) find that impact as one from 8 procedures to 4.
the effects of the SARE (Sistema de Apertura 2. Moving from the 75th to the 25th percentile in the
R�pida de Empresas) program in Mexico were Doing Business 2010 rankings would mean reducing the
significantly larger in areas with better overall cost to start a business from 24.5 percent of income per
investment climates. capita (as in Peru) to 0.7 percent of income per capita
(as in Singapore) (World Bank 2009).
Conclusion 3. See Nicoletti and Scarpetta (2005); Bartelsman,
Evidence from both microeconometric and Haltiwanger, and Scarpetta (2004, 2009); and Alam and
cross-country studies as well as from firm demo- others (2008). The data come from business registers,
graphics studies shows that reforms to ease busi- social security databases, and corporate tax registers.
ness entry are associated with increases in the The sample therefore comprises the universe of all for-
number of new firms and sustained gains in eco- mally registered firms and allows the study of entering
nomic performance, including improvements as well as exiting firms.
in employment and productivity. Countries 4. World Bank Group, Doing Business database.
around the world are aware of the importance
of reforms to reduce the time and cost to reg- References
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Development Working Paper 159, University of through Difficult Times. Washington, DC: World Bank.
To order additional copies
California, Berkeley.
contact Suzanne Smith,
Fisman, Raymond J., and Virginia Sarria-Allende.
managing editor,
2004. "Regulation of Entry and the Distortion of
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