The Impact of Business Environment Reforms on New Firm Registrations By Leora Klapper and Inessa Love

1. The Impact of Business Environment Reforms on New Firm RegistrationsBy LeoraKlapper and Inessa Love Discussant Comments Mary Hallward-Driemeier March 30, 2011

2. Contributions • Extends analysis of impact of business reforms on 3 dimensions • Threshold effects on impact of reforms • Benefits of simultaneous or sequenced reforms • Whether starting-point matters • Data • Firm registration • 92 countries • Panel Can test for impact using country fixed effects, looking at impact of changes in regulations over time within a country

3. Outcome measured captures important slice of ‘entrepreneurship’ • Entry density (# newly registered firms/1000 working age people) • New firms that register or newly registered firms? • Bruhn 2011: few informal firms registered post-reform (Mexico) • Discussion often framed as register or not; but tied to entry decision • If not registered, would they not have entered? Or been informal? (data not available) • Limited liability companies • Demonstrate they are far more prevalent in higher income countries • Urbanization/agriculture • Affects measure of ‘density’ • Size of informal sector • But also among registered firms (see chart) • Do definitions or criterion vary across countries? • civil-common law countries • Min. capital; min labor? • Factors beyond ‘starting a business’ regulations affect choice to be LLC. Limited liability companies represent differing shares of registered firms with 5+ employees Source: Enterprise Surveys

4. Annual changes in entry-density are large Median annual change: 10% 75th percentile: 25%

5. Approach: Changes in registration process affects relative cost-benefits of registering (entry, LLC) Small reform: b < c1 < c0 Large reform: c1 <b < c0 • Costs of registration process is only a small share of total cost of being a registered firm • Are co-c1 large enough to shift the balance? • Is adjustment a change in stock of registered firms? Or change in growth of new registered firms? • Model assumes latter – does the effect persist? • What if allow multiple treatments on same DB dimension within country? • Why do countries reform? • Possible endogeneity? • Omitted variable? • Is DB capturing true costs of registration? Do changes in DB capture true changes facing firms? • Proxying for other domestic trends? • How well does DB capture what firms actually face?

6. Variation in dealing with regulations vary more within a country than across countries • And the ‘cost’ of high DB measures is often paid through corruption: • the frequency of bribes is higher where the de jure – de facto gap is larger. Source: Hallward-Driemeier and Pritchett, 2011. “How Business is Done and the Doing Business Indicators”

7. Changes in DB – aren’t necessarily reported as experienced on the ground • But in some cases where de facto has risen (or declined less), the gap between de jure and de facto has closed • Enforcement may have improved • Greater awareness of benefits of registration • Scope for corruption may have narrowed, encouraging greater entry 45o Source: Hallward-Driemeier and Pritchett, 2011. “How Business is Done and the Doing Business Indicators”

8. Suggestions • 1) Threshold effects • Look at role of institutional quality – does it affect the impact of a reform? • Is the threshold in the change in DB or in institutional quality (i.e. 10% change can matter, but only if the institutional quality is good enough)? • 2) Simultaneous or sequential reforms • Looked at in terms of different dimensions of ‘starting a business’ (i.e. time, cost, # procedures) • BUT • Other regulatory reforms? • Have broader DB reforms available to test • Tax reforms • Other reforms or public investments (e.g. infrastructure) that improve the business climate?

9. 3) Whether starting-point matters? • Careful to nuance strength of findings – some evidence on minimum capital requirements; less significance for others. • And as minimal capital requirements has ‘GDP per capita’ as denominator, some of the ‘improvements’ are due to growth (which may independently encourage entry), not actual changes in the requirements. • Worth restricting to where there are actual reforms. • Reinforces likely role of institutional quality in making reforms stick • Hallward-Driemeier and Pritchett (2011) – not surprising that at upper end of DB, could make even large formal change before hits most firms’ experience or induce change in behavior. • Likely get larger impact if start at lower level – because enforcement gap is likely smaller (or institutions are stronger) • Implies previously ‘good DB’ reformers are driving the results rather than larger absolute changes in previously ‘bad reformers’ • However, for ‘good DB performers’ (low DB numbers), even large % change in DB may actually be small absolute change – harder to reconcile with model that points to comparisons of levels of costs and benefits.