# **III. Business reforms**

It is important to have a healthy private sector for an economy to thrive. And in order to allow private businesses to flourish, governments put in place laws and regulations that support entrepreneurship, allowing businesses to operate smoothly and expand. Therefore, regulators continuously strive to improve local business climate. Reforms aimed at fostering private sector development and growth often entail features such as cutting the red tape, aligning domestic laws with international best practices and introducing modern ways of doing business (i.e. use of electronic platforms). Reforms implemented in the areas measured by _Doing Business_ have proved to have favorable impacts on local economies. Some of the core benefits of _Doing Business’_ regulatory changes include increase in entrepreneurial activity and employment rates as well as upsurge in competition and innovation.<sup>4</sup> A substantial body of research shows the significance of reforms aimed at enabling favorable regulatory environment for entrepreneurship and hence firm creation. Klapper et al. (2006) highlight that costly regulations impede the establishment of new firms, especially small ones and particularly in the industries that are normally characterized by high entry propensity. Furthermore, cumbersome regulations mostly favor large firms, hindering growth of incumbent smaller businesses. Similarly, Klapper and Love (2010) explore how ease of registering a business and relevant regulatory reforms affect registrations of new firms. The authors demonstrate that costs, number of days and procedures required to start a business are the key factors impacting new firm registration.

Research also shows that improvements in business regulation can drive additional job creation, which is prompted by increased firm registration. Bruhn (2011) analyzed reforms that simplified business entry regulation in Mexico. The author finds that these reforms encouraged wage earners to open their own businesses, increasing the number of registered firms by 5%, while at the same time increasing wage employment by 2.2%. In the same vein, Branstetter et al. (2010), using Portuguese micro level data, investigated economic effects of a regulatory reform in Portugal. Their study found that the reform brought about an increase in the number of firms created as well as in the overall employment level. The authors note that the increase occurred predominantly among the firms that were at the highest risk of being deterred by heavy entry requirements. These were typically small firms, owned by entrepreneurs with relatively poor education level. And such firms commonly operated in agriculture, retail trade and construction sectors. The link between regulation and firm creation is further researched by Bripi (2016). Using data on time and cost to start a business and entry rates by industry in the period of 2005-2007, the author analyzes the impact of entry regulation on firm creation in Italy. The cross-sectional analysis of the data shows that the length and costliness of procedures contribute to lower entry in sectors with commonly high entry.

Economic theory suggests that employment as a reliable source of income can ultimately lift people out of poverty and reduce income inequality. Economies with poor quality business regulation have, on average, higher levels of income inequality. Furthermore, when business regulation is overly cumbersome, posing severe obstacles to companies’ daily operations, businesses become more prone to corruption and bribery. Paunov (2016) demonstrates that the

> 4 Bruhn 2013; Branstetter et al 2010; Klapper and Love 2010; Paunov 2016.

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