The Entrepreneurial Activity Across Diverse Regulatory Regimes: Promotion, Obstruction and Unintended Consequences of Business Startups' Regulations

Anas S. Albanyan


This comparative study examines the relationship between entrepreneurship and institutions in five countries. The term "entrepreneurship" refers to the creation of a new business, and "institution" refers to a set of rules governing the entrepreneurial game. Five institutions were examined in this study: regulation of entry, securities regulations, startup governance and private ordering, taxes and public support, and liquidation mechanisms. These institutions were examined across the United States, Canada, Germany, Japan, and Saudi Arabia.

This dissertation finds that law and informal rules do impact entrepreneurship, and that this impact is not always positive. In certain areas, extensive regulation of, say, securities, can be associated with heightened entrepreneurial activity. This dissertation finds that countries characterized by relatively strict securities regulation in terms of capital formation for startups have higher entrepreneurial activity than countries with securities regulations that arc friendly to startups. With regard to other institutions, such as regulation of entry, too much regulation can deter entrepreneurial activity. This dissertation finds that countries that arc characterized by a liberal regulation of entry regime, such as the United States and Canada, have relatively high new business rates, and countries that are characterized by a strict regulation of entry regime, such as Germany and Saudi Arabia, have large informal economics. This study further finds that countries that have more attractive venture-backed exits offer more flexible laws governing these exits.

Regulations inherently involve delays in timing of the activities governed by such rules, and as a result, risks and costs increase. Also, rigid rules limit startup participants' ability to engage in private ordering, which is the main mechanism by which participants can address risk. While in this context, enabling rules are desirable, they are not silver bullets. Many other factors must be in place so that these enabling rules generate the expected benefits. These other factors include a rich legal community and a high-quality legal system, in addition to cultural factors that make it possible to share control with outsiders. Nonetheless, even in situations where enabling rules are overall desirable, there arc grounds for having mandatory rules, such as when the private ordering generates negative externalities ( e.g., non-compete provisions).

Finally, governments should be very careful when financially supporting the entrepreneurial market because a poorly structured public financial support program can have a negative impact on entrepreneurial activity. While several forms of public financial support are possible, the best model is indirect financing upside leverage. In sum, institutions matter for entrepreneurial activity.