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32 DOING BUSINESS 2014 TABLE 3.1 Recent research using Doing Business and related indicators by area of study and methodology Methodology/area of study Natural experiments and difference-in-difference estimators Instrumental variable panel estimators Other panel estimators Instrumental variable cross-sectional estimators Other cross-sectional estimators Firm entry and labor market regulations Branstetter and others 2013; Bruhn 2013, 2011; de Mel, McKenzie and Woodruff 2013; Kaplan, Piedra and Seira 2011; Monteiro and Assunção 2012 Dreher and Gassebner 2013 Amin 2009 Trade regulations and costs Chang , Kaltani and Loayza 2009; Busse, Hoekstra and Königer 2012; Portugal-Perez and Wilson 2011; Şeker 2011 Djankov, Freund and Pham 2010; Freund and Rocha 2011 Hoekman and Nicita 2011 Regulations on courts, credit markets, bankruptcy laws and investor protection Giannetti and Jentzsch 2013; Giné and Love 2010; Lilienfeld-Toal, Mookherjee and Visaria 2012; Love, Martinez- Peria and Singh 2013; Visaria 2009 Cavalcanti 2010; John, Litov and Yeung 2008 Büyükkarabacak and Valev 2012 Houston and others 2010 Tax regulations Monteiro and Assunção 2012 Lawless 2013 Djankov and others 2010 Business regulatory environment and economic performance Amiti and Khandelwal 2011 Barseghyan 2008; Freund and Bolaky 2008 Dall’Olio and others 2013; Dutz and others 2011 Djankov, McLiesh and Ramalho 2006 Note: Janiak (2013) and di Giovanni and Levchenko (2013) are not included here because they are theoretical papers, not empirical. Nevertheless, the authors use Doing Business data to calibrate their theoretical models. To take into account the effects of individual characteristics of informal business owners on their occupational choices after the reform, Bruhn (2013) separates informal business owners into 2 groups: those with characteristics similar to formal business owners and those with characteristics similar to wage workers. It then estimates the impact that the reform had on the occupational choices of the 2 groups. Bruhn finds that in municipalities with high pre-reform obstacles to formal entrepreneurship, the reform caused 14.9% of informal business owners with characteristics similar to those of formal business owners to shift to the formal economy— while it caused 6% of informal business owners with characteristics similar to those of wage workers to shift to wage employment. These results suggest that the informal economy has different types of business owners who react to reforms differently. For example, some individuals become informal business owners because of cumbersome regulations while others do so temporarily until they find a job. Kaplan, Piedra and Seira (2011) use the same data from Mexico to construct a counterfactual scenario showing how quickly new firms would have been created without the business registration reform. Their scenario uses two control groups: municipalities that did not adopt the reform and industries not eligible for it. The idea is that control municipalities and industries are good proxies for what would have happened in treatment municipalities and industries in the absence of the reform. The authors find that the simplified entry regulations led 5% of informal firms to shift to the formal economy, though they note that this effect is not permanent. Bruhn (2013) explains the modest percentage shift of firms from the informal economy in response to the reform as partly resulting from lower benefits of formalization and the fact that the reform only covered business registration at the municipal level and business owners still needed to register with the federal tax authority. But Kaplan, Piedra and Seira (2011) point out that the cost of taxes, the scarcity of marketable ideas and the limited benefits of being formal are far more important obstacles to creating and formalizing firms. Accordingly, they conclude that for reform to have a large impact on formality and firm creation, it should be comprehensive. Branstetter and others (2013) offer further evidence that simpler business registration helps create formal firms. The authors use nationwide, micro-level matched employer-employee data from Portugal collected in 2000 and 2006 to examine the impact of a reform program, called On the Spot Firms, introduced in 2005. The program substantially cut business registration procedures and costs by introducing one-stop-shops. Using a difference-in-difference methodology based on a comparative analysis of firms established before and after the program to isolate the program’s impact on business start-ups, the authors find that reducing the time and cost of firm registration increased the number of start-ups by 17% and created about 7 new jobs a month per 100,000 county inhabitants in eligible industries.
RESEARCH ON THE EFFECTS OF BUSINESS REGULATIONS 33 TABLE 3.2 Summary findings of recent research using Doing Business and related indicators by methodology Methodology Natural experiments/ difference-in-difference estimates Findings of recent research In Portugal cutting the time and cost of firm registration increased the number of business start-ups by 17% and created about 7 new jobs a month per 100,000 county inhabitants in eligible industries. The start-ups created after the reform are smaller, more likely to be owned by women, headed by relatively inexperienced and poorly educated entrepreneurs and have lower sales per worker than startups created before the reform (Branstetter and others 2013). In municipalities with high constraints to formal entrepreneurship, business registration reform caused 14.9% of informal business owners with characteristics similar to those of formal business owners to shift to the formal economy in Mexico (Bruhn 2013). A reform that simplified business registration in Mexican municipalities increased registration by 5% and wage employment by 2.2%. It also decreased the income of incumbent businesses by 3% due to increased competition (Bruhn 2011). Providing information about registration or paying for it do not necessarily increase formalization, particularly when there are other barriers to it (de Mel, McKenzie and Woodruff 2013). Simplified entry regulations led 5% of informal firms to shift to the formal economy in Mexico, though this effect is not permanent (Kaplan, Piedra and Seira 2011). Mandatory credit reporting systems improve financial intermediation and access, particularly when used in conjunction with credit information systems (Giannetti and Jentzsch 2013). A reform making bankruptcy laws more efficient significantly improved the recovery rate of viable firms in Colombia (Giné and Love 2010). Debt recovery tribunals in India caused a decrease in the borrowing and fixed assets of small firms and an increase in the borrowing, fixed assets, and profits of large firms (Lilienfeld-Toal, Mookherjee and Visaria 2012). Introduction of collateral registries for movable assets increased the firms’ access to finance by around 8%. The impact was larger for smaller firms (Love, Martinez-Peria and Singh 2013). Debt recovery tribunals reduced nonperforming loans by 28% and interest rates on larger loans, implying that faster processing of debt recovery suit cut the cost of credit in India (Visaria 2009). Business licensing among retail firms rose 13% after a tax reform in Brazil (Monteiro and Assunção 2012). Import competition leads to much smaller quality upgrading in OECD economies with more cumbersome regulations, while in non-OECD economies with more cumbersome regulations it does not have effect on quality (Amiti and Khandelwal 2011). Instrumental variable panel estimates When credit market frictions are low, a reduction in credit market frictions decreases the impact of financial shocks on macroeconomic volatility (Cavalcanti 2010). Strong investor rights lead to higher corporate risk-taking and growth (John, Litov and Yeung 2008). An increase in entry costs of 80% of income per capita decreases total factor productivity by 22% and output per worker by 29% (Barseghyan 2008). A 1% increase in trade is associated with more than a 0.5% increase in income per capita in economies with flexible entry regulations, but has no positive income effects in more rigid economies (Freund and Bolaky 2008). Other panel data estimates Cumbersome procedures and high levels of minimum capital are negatively associated with firm entry. Stringent regulations go hand in hand with corruption (Dreher and Gassebner 2013). Increasing trade openness has larger effects on growth when labor markets are more flexible (Chang, Kaltani and Loayza 2009). Better regulations are associated with lower time and costs of trading in developing economies (Busse, Hoekstra and Königer 2012). Good, efficient infrastructure and a healthy business environment are positively linked to export performance (Portugal-Perez and Wilson 2011). Improvements in trade facilitation and entry regulations raise export volumes and reduce distortions caused by restrictions on access to foreign markets (Şeker 2011). Public credit registries and private credit bureaus reduce the probability of bank crises, particularly in low-income economies (Büyükkarabacak and Valev 2012). Complex tax systems are associated with lower numbers of foreign direct investment in an economy but do not affect its level. A high corporate tax rate, on the other hand, is negatively related to both the number and level of foreign direct investment. A 10% reduction in tax complexity is comparable to a 1% reduction in effective corporate tax rates (Lawless 2013). Improvements in the Doing Business indicators are positively associated with increases in labor productivity in the manufacturing and services sectors in EU-15 and EU-12 countries, though this association is stronger in EU-12 countries (Dall’Olio and others 2013). Doing Business indicators such as getting credit, protecting investors and trading across borders are positively associated with product and process innovation for young firms in non-OECD countries (Dutz and others 2011). (continued on next page)
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