Barriers to entry index: a ranking of starting a business difficulties for the United States
| Date | 07 November 2016 |
| Pages | 285-307 |
| Published date | 07 November 2016 |
| DOI | https://doi.org/10.1108/JEPP-02-2016-0007 |
| Author | Megan Teague |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Barriers to entry index: a
ranking of starting a business
difficulties for the United States
Megan Teague
Department of Economics, George Mason University, Fairfax, Virginia, USA
Abstract
Purpose –The purpose of this paper is to present a new data set documenting various costs to
starting a business across the 50 US states for the year 2011.
Design/methodology/approach –The first ranking weights and organizes measures using
principal components analysis. The second ranking averages subcomponents of the data across
groups of variables with common themes.
Findings –Most states largely maintain their relative position across both Methods 1 and 2 despite
the difference in organization and weight of variables and groups across the two ranking methods –21
of the top 25 states remained in the top 25 in both the Methods 1 and 2 rankings. Some states
experience not insignificant changes between the two indexes and a few experience substantial
changes. These changes can be attributed to the importance Method 1 places upon final fees, final
processing time, and application formats for the Secretary of State.
Research limitations/implications –A lack of empirical evidence, additional data, and a definitive
theory on the impacts of barriers to entry measures for the USA constrains both how the data are
presented as well as which measures were collected. This paper attempts to accommodate for this by
presenting rankings derived from different methodologies.
Practical implications –The composite barriers to entry measures can be used in policy analysis
and possible research on rent-seeking. These data can also be used to study the determinants and
relative costs of entrepreneurship.
Originality/value –This paper presents entry-specific regulatory measures currently undocumented
in the literature.
Keywords Index, Ranking, Barriers to entry
Paper type Research paper
1. Introduction
Across countries, barriers to entry are barriers to development. Countries with
increased entry barriers have more corruption and larger unofficial economies
(Djankov et al., 2002), lower rates of innovation and of productivity (Arnold et al., 2011;
Barseghyan, 2008), and less competitive business environments (Klapper et al., 2006).
These differences in barriers to entry, however, may be explained away by the
quality of institutions. That is: countries with smaller governments, sound money and
property rights, freer trade, and lower regulation also tend to rank better on ease of
starting a business measures (Gwartney, 2009). What purpose, then, do barriers to
entry serve in countries with high-quality institutions? Also, what impacts do barriers
to entry have on development in countries with better institutions?
In the USA, a country with high-quality institutions, barriers to entry may make legal
systems run more smoothly (Arruñada, 2007), they may produce higher quality goods and
services (Pigou, 1924), and they may improve overall societal welfare (Pigou, 1924) for the
reasons public interest theory suggests. Entrepreneurship may benefit, on net, because
Journal of Entrepreneurship and
Public Policy
Vol. 5 No. 3, 2016
pp. 285-307
©Emerald Group Publis hing Limited
2045-2101
DOI 10.1108/JEPP-02-2016-0007
Received 24 February 2016
Revised 11 April 2016
12 April 2016
Accepted 12 April 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification —K2, L26
285
Barriers to
entry index
barriers to entry filter out poor quality entrants and allow governments to more easily
enforce contracts. Alternatively, barriers to entry could be the consequence of regulatory
capture as the public choice theorists predict (Stigler, 1971) hurting business development,
on net. As Baumol (1990) suggests –and Murphy et al. (1991) as well as Gohmann et al.
(2013) illustrate –the distribution of entrepreneurship that results in innovat ion and
development (productive entrepreneurship) may be a consequence of the relative payoffs
in innovating productively vs innovating in unproductive or destructive ways
(rent-seeking). Consistent with this, Calcagno and Sobel (2013) find for the USA,
regulations facilitate the development of larger businesses and hurt smaller businesses.
Despite the interest and debate, the use of explicit measures of barriers to entry are
largely absent[1]. This paper fills this gap by presenting a new state-level da ta set with
measures of entry regulations for the USA in 2011. The data set follows the empirical
cross-country barriers to entry literature generally documenting the accessibility of
registration, the total costs of registering, and the final time it takes to fully process
applications for limited liability corporations (LLCs) (see De Soto, 2003; Djankov et al.,
2002; Klapper et al., 2006; World Bank, 2016 in particular). It improves upon this
literature by adding measures of occupational licensing which will allow researchers to
control for or discriminate across occupation type.
Also included in this paper are two indexes that rank states based upon the process
of starting a business. It is unclear how to compile the various measures or how to
weight them according to their relative importance because there is so little empirical
work which uses explicit measures of barriers to entry in the USA. Additionally, for the
same reason, it is unclear which theory –public interest or public choice –should
motivate the organization of the measures. To accommodate for these deficiencies,
the first index uses principal components analysis to objectively weight and compile
measures according to statistical importance. For those researchers who are
uncomfortable depending upon data to guide theory or for those researchers who
want a general, unweighted measure of barriers to entry, the second index follows the
methodology of the Economic Freedom of the World Index (Gwartney et al., 1996) and
compiles measures by averaging equally across groups.
The paper proceeds as follows: Section 2 presents and describes the composition
and theory behind the barriers to entry measures; Section 3 contains the two indexe s;
Section 4 concludes and offers recommendations for future work.
2. Data and methodology
This paper uses a new data set that describes the state requiremen ts necessary to start
an LLC. The data are separated into two types of procedures. The first set of
procedures, called explicit costs, document the degree of accessibility of registration,
the fees associated with registering, and the maximum length of time it could take to
fully register. All LLCs must complete these requirements regardless of their practice.
The second set of procedures –bureaucratic difficulties –proxy occupational licensing
requirements. Most LLCs, but not all, will have to comply with occupational licensing.
These vary by state and occupation.
Data are documented for LLCs as opposed to corporations, partnerships, or sole
proprietorships for several reasons. For one, LLCs are a standard business type well
documented across the cross-country barriers to entry literature because they allow for
more risk taking which is predominantly absent from sole proprietorships or
partnerships (Klapper et al., 2006). Innovations which contribute to economic growth and
development, then, more likely come from business types like LLCs or corporations.
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