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POTENTIAL ECONOMIC GAINS FROM MAKING IT EASIER TO START A BUSINESS

  • Published Date: June 2014

POTENTIAL ECONOMIC GAINS FROM MAKING IT EASIER TO START A BUSINESS: New evidence from Portugal

Reforms in Portugal a decade ago that made it much easier for people to start a business led to a considerable increase in the number of companies and jobs but only a modest overall economic gain. That is the central conclusion of research by Professors Lee Branstetter, Francisco Lima, Lowell Taylor and Ana Venâncio, which is published in the June 2014 issue of the Economic Journal.

Their study reveals that the new companies created as a result of the reform were typically small, owned by relatively poorly educated entrepreneurs and operated in low-technology sectors, such as agriculture, construction and retail. Compared with companies that had opened before the reform, the new companies were less likely to survive their first two years, had lower sales per worker and paid slightly lower wages.

The authors note that in the mid-2000s, the barriers facing aspiring entrepreneurs in Portugal were among the highest in Western Europe, according to the World Bank. But in 2005, Portugal implemented the ‘on the spot firm’ programme (Empresa na hora), which established ‘one-stop shops’ that simplified the opening of a company and charged prospective entrepreneurs significantly reduced administrative fees. This reform reduced the time taken to incorporate a company from several months to as little as one hour; and it reduced fees from €2,000 to less than €400.

These one-stop offices were opened across the country over the next few years. As a consequence of the reform, Portugal’s ranking in the World Bank’s ‘Doing Business Index’ moved up from 113rd (out of 155 countries) to 33rd, and Portugal was cited by the World Bank as the top reformer in business entry regulation in 2005/06.

The research takes advantage of the facts that the degree of adoption of the reform varied in terms of regions of the country and timescale, and that a rich sample of matched employer-employee data was available. These data made it possible to compare the characteristics of new companies that opened as a result of the reform with those of companies that opened prior to its implementation.

Among the findings:

• The reform largely worked as intended: it increased the number of monthly start-ups by approximately 17% and the number of new jobs by 22%.

• If all the regions of Portugal had adopted the programme over a period of two years, there would be roughly 4,500 new companies and approximately 17,500 new jobs would have been created.

• But overall the gains were modest on account of the characteristics of the new companies that entered the market as a result of the reform. These were mainly ones that would have been easily put off opening a business beforehand due to the heavy entry regulations.

• While the estimated impact of the reform was non-trivial, to put it in context, the Portuguese labour force was approximately 5.5 million in 2005, with more than 400,000 unemployed. Consequently, the reform only contributed a marginal improvement to an already poorly performing labour market.

• Nevertheless, the reform was achieved at relatively low cost. The programme took advantage of pre-existing resources and facilities, and staff were reallocated to the new programme from departments that had dealt with the previous system. The majority of the investment was spent on training and development.

Co-author Ana Venâncio comments:

‘Overall this reform created a few jobs at relatively low cost, but the resulting gains were limited due to the low quality of the newly created companies.

‘The reform did bring benefits, but it was hardly the magic bullet that some policy-makers might have anticipated.’

ENDS


Notes for editors: ‘Do Entry Regulations Deter Entrepreneurship and Job Creation? Evidence from Recent Reforms in Portugal’ by Lee Branstetter, Francisco Lima, Lowell Taylor and Ana Venâncio is published in the June 2014 issue of the Economic Journal.

Lee Branstetter and Lowell Taylor are at Heinz College, Carnegie Mellon University. Francisco Lima is at the Instituto Superior Técnico, University of Lisbon. Ana Venâncio is at the ISEG-Lisboa School of Economics and Management, University of Lisbon.

For further information: contact Ana Venâncio via email: avenancio@iseg.utl.pt; or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).