The relationship between business regulation and nascent and young business entrepreneurship revisited

We empirically examine the relationship between business regulation and total (i.e., formal and informal) entrepreneurship using a unique panel data set. We estimate separate regressions for opportunity-driven and necessity-driven nascent entrepreneurship as well as young business entrepreneurship based on two different estimation methods (pooled OLS and system GMM). Our results show that business regulation generally rather hinders entrepreneurship. If we additionally consider the development stage of countries, we find different results for high-income and lower-income countries: first, we surprisingly find that stricter employment protection legislation positively affects entrepreneurship in lower-income countries where the informal sector is larger. This might be because more rigid employment laws make waged employment less attractive to employers, who thus push employees into dependent or informal self-employment. Second, we find that stricter insolvency regulation hinders entrepreneurship only in high-income economies. In lower-income economies, where there are more unregistered businesses, insolvency laws might be more difficult to enforce, so entrepreneurship rates are less affected. Third, we find that government intervention in the form of high-quality governmental support programs stimulates opportunity nascent and young business entrepreneurship. This relationship is apparent only in high-income countries, where the formal sector is larger, as such programs typically address formal rather than informal entrepreneurs. Governmental support programs may thus reach the goal of facilitating entrepreneurship only in high-income economies.