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

Discussant CommentsMary Hallward-DriemeierMarch 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)

0

20

40

60

80

AFR SAS EAP ECA LAC

Limited Liability

Sole Proprietorship

Partnership

Other

Source: Enterprise Surveys

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.

Annual changes in entry-density are large

Median annual change: 10%75th percentile: 25%

02

04

06

08

01

00F

req

uenc

y

-100 0 100 200Annual Growth in Entry-Density

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

Source: Hallward-Driemeier and Pritchett, 2011. “How Business is Done and the Doing Business Indicators”

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.

Changes in DB – aren’t necessarily reported as experienced on the ground

Source: Hallward-Driemeier and Pritchett, 2011. “How Business is Done and the Doing Business Indicators”

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

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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.