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United States Small Business Administration 
Office of Advocacy 
RS 147_______________________________________________________________________________________________







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Purpose

Do environmental regulations hurt small business formation? The
regulation on small business. Environmental risks are governed
by more than 11,000 pages of federal rules and regulations, promulgated
by a variety of federal acts. In addition, more than $100 billion
is spent annually to comply with federal environmental regulations.

This research focused on the question of whether these actions
favor large existing manufacturers at the expense of small new
manufacturers. To the extent that the formation of small establishments
are dissuaded by onerous environmental regulations, large establishments
are provided with a competitive advantage and pollution-intensive
industries will likely evolve toward greater concentration.

Viewing environmental regulation as a potential barrier to small
manufacturing establishments, this study examined three primary
questions: (1) What is the nature of the effect of environmental
regulations on the formation of small establishments, (2) How
has that effect changed over time, and (3) How do environmental
regulations affect small establishment formation compared with
large establishment formation.

Scope and Methodology

Economic theory predicts that environmental regulations deter
the births of small establishments through resultant increases
in the minimum efficient scale of plant operations. Regulations
impose higher costs by requiring more complicated business administrative
and operational activities. Regulations also create more difficult
facility siting and permitting procedures.

This analysis used a mediated regression methodology on a sample
of 202 four-digit Standard Industrial Classification (SIC) code
manufacturing industries for three census years (1977, 1982 and
1987). A regression model of small establishment formation was
estimated for each of the three periods; these regressions were
compared with models of large establishment formations. The mediated
regression methodology allows for a determination of whether the
barrier effects operated through an increase in industry minimum
efficient scale or through other mechanisms.

The researchers selected establishments as the unit of analysis
because data on small independent firms - the ideal measure for
this study - are not available. The data sources used in the study
include the U.S. Small Business Administration's U.S. Establishment
and Enterprise Longitudinal Micro Data file, and the U.S. Department
of Commerce's Census of Manufacturers, Annual Survey of Manufacturers,
Survey of Plant Capacity, and Report of Pollution Abatement Costs
and Expenditures.

Small establishments are, however, likely to be independent firms.
Moreover, the robustness of the results of comparisons of small
and large establishments refutes the notion that the results are
biased by the chosen unit of analysis.

Highlights

- Environmental regulations exert a remarkably consistent deterrent
effect on small establishment formation over the three periods
studied. The nature of the effect, however, changed over time.
- In 1977, the deterrent effect of environmental regulations
operated exclusively through increases in the minimum efficient
scale of production.
- In 1982 and 1987, increases in efficient scale accounted for
only part of the deterrent effect of environmental regulations
on small establishment births. The deterrent effect in these years
shifted to other mechanisms such as the higher costs of increased
business complexity and growing difficulties in siting and permitting
of new facilities.
- Environmental regulations exerted less of a deterrent effect
on the formation of large establishments than on small establishments.
In the statistical tests used to analyze the formation of large
establishments, the coefficient for pollution-abatement intensity
was statistically insignificant in all three periods.

Ordering Information

The complete report is available from:

National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)

Order Number: PB95-100277

Cost: A03; A01 Microf.
*Last Modified 6-11-01