The Impact of Business Environment
Reforms on New Firm Registrations
By Leora Klapper and Inessa Love
Discussant Comments
Mary Hallward-Driemeier
March 30, 2011
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
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 represent differing
shares of registered firms with 5+ employees
• 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.
80
60
Limited Liability
40
Sole Proprietorship
Partnership
Other
20
0
AFR
SAS
EAP
Source: Enterprise Surveys
ECA
LAC
60
40
0
20
Frequency
80
100
Annual changes in entry-density are large
-100
0
100
Annual Growth in Entry-Density
Median annual change: 10%
75th percentile: 25%
200
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?
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”
Changes in DB – aren’t necessarily
reported as experienced on the ground
45o
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
Source: Hallward-Driemeier and Pritchett, 2011. “How Business is Done and the Doing Business Indicators”
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?
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.