Will Easier and Fluid Regulatory Practices Lead to More New Business Creation?

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July 27, 2014 by b2bwest

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Small Businesses have long sought reform on the government’s latent obstacles inhibiting the start-up and running of a business. EU initiatives have been devised to ‘cut red tape’, but the reality in Ireland is that these initiatives were not sustained and were brought to a grinding halt in 2012. The facts are that the burdens on small business are increasing rather that lessening thereby hampering growth of small businesses. The attempts to reduce the administration and compliance processes have actually shifted to a higher burden onto businesses and individuals and away from the authorities requiring compliance in the first place.

How has this come about?

The cost of complying with government regulations is one of those issues problems that does not receive enough attention. Taking the US as an example, research undertaken on behalf of the Office of Advocacy of the Small Business Administration revealed that the cost of complying with government regulations was higher for small businesses than for midsize or large ones (45% higher on a per-employee basis, on average in 2004).

For businesses with less than 20 employees, compliance costs exceeded $7,600 per employee, compared to $5,300 for businesses with 500 or more employees. The net result of this is the hidden statistic that regulatory compliance is significant impediment and a drain on start-up capital. The equation is that the more regulation, the fewer start-ups will occur. Ironically, from our own surveys, we found a high level of acceptance for the need for regulations in safety, food hygiene and other areas, but the management and communications processes attached to compliance were unwieldy, time wasting and old-school.

The World Bank’s entrepreneurship survey in 2008 unveiled that countries with easier and less expensive procedures for registering new businesses have higher percentages of new business creation.

 In other words, the countries that tightly regulate the formation of a business have had fewer start-ups.

 It is recognised that start-ups and small business is hugely important for job creation, wealth generation, and developing a domestic economy, but entrepreneurs by their nature are ‘paperwork adverse’ and high levels of regulation do impede entrepreneurial ambitions.

The GEM (Global Entrepreneurship Monitor) report revealed that a country’s score on the World Bank’s 2007 red tape index is negatively related to the share of business owners who expect to employ at least 20 people in five years. Based on its findings, the GEM report concluded that “all other things being equal, the more onerous a country’s new business regulations, and the more local experts perceive these regulations to be onerous, the lower the level of ambition among a country’s entrepreneurs.” Although perceived as simplifying processes, the reality is that regulation is growing and will continue to do so. In addition the ownership and responsibility is shifting more onto the business owners to maintain compliance and it is only in year 2 – 5 of operation that the weight of compliance and regulation is applied, impacting among other things, the rate of failure.

Bruce Phillips and Holly Wade, representing the lobbying group National Federation of Independent Business’ publication Small Business Problems & Priorities, reported that “unreasonable government regulations” ranked sixth among problems for small business owners in 2008, up from ninth in 2004, with 21% of respondents reporting this problem as critical. Phillips and Wade also found that the US government proposes about 150 new rules annually (similar to Ireland)  with each added rule costing small businesses in the US some $100 million in compliance costs.

It is essential that government policymakers listen to the needs of the small business sector, being a vital spark to economic recovery and seriously address, in real terms, the reduction of regulatory compliance time and costs in a meaningful way as a way to stimulate our domestic economy growth and job creation capability.

B2BWest are continually collecting information and feedback on compliance burdens for Irish Business so if you have an input, just add your comments to their survey at https://www.surveymonkey.com/s/HNTFLLK

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