REGULATORY RED TAPE AND PRIVATE FIRM PERFORMANCE
| Published date | 01 March 2015 |
| Date | 01 March 2015 |
| Author | ARJEN VAN WITTELOOSTUIJN,GJALT DE JONG |
| DOI | http://doi.org/10.1111/padm.12098 |
doi : 10. 1111/p adm .12098
REGULATORY RED TAPE AND PRIVATE FIRM
PERFORMANCE
GJALT DE JONG AND ARJEN VAN WITTELOOSTUIJN
Regulation may obstruct dynamic adaptation, innovative power, and entrepreneurial activity.
On the other hand, regulation could be interpreted as a phenomenon which society just has to
learn to live with, and which otherwise does no real economic harm. This article explores both of
these hypotheses. We study the impact of three dimensions of regulatory red tape on the perfor-
mance of private companies: regulation cost, regulation change, and regulation inconsistency. We
analyse unique survey data from 530 Dutch private companies. The results show that regulation
cost, inconsistency, and change limit sales turnover growth, and that regulation change hampers
market competition performance.
INTRODUCTION
Regulation can have a positive or negative effect on private rm performance (Bozeman
2000; OECD 2010). The positive performance impact of regulation may run through
increased action capability and organizational efciency. Furthermore, private incumbent
rms may benet from regulation that restricts competition. Similarly, due to regulation,
private rms may gain access to markets that previously were only open to government
organizations. Many private rms, however, predominantly complain about the negative
effects of regulation. For example, rms often argue that they need to comply with
more and more rules that are frequently changed, and that increasingly require inside
and outside legal expertise in order to understand the complex requirements and their
implications for a rm’s business practices, processes, and strategies.
The consequences of regulation are attracting increasing attention in Western democra-
cies. The commonly held view that regulation constrains entrepreneurship and limits wel-
fare (Djankov et al. 2008) induced policy-makers to review their regulatory practices and
regulation stocks. Today, a reduction in regulatory requirements is on the policy agenda
in almost all European countries and international organizations, which is exemplied by
the growth of so-called ‘better-regulation programmes’ (Dunleavy 1986). The case of the
Netherlands, our research context, is illustrative, which is often portrayed as a leading
nation in this area of better-regulation policies (Linschoten et al. 2009).
In economics, Stigler (1971) was among the rst to study the costs and benets of regu-
lation. Economists acknowledge that regulation is a means by which governments can
achieve social benets that are not directly related to private rms. For example, gov-
ernments impose regulation to protect employee health and safety, to stimulate compe-
tition, or to guarantee access to public goods such as education and health services. This
aligns well with Bozeman’s (2000) theory of red tape. Most regulation starts out with some
implied causal purpose that for someone things will be made better.These potentially posi-
tive effects, along with distribution of wealth concerns, are a legitimate basis for regulation
irrespective of whether or not regulation makes rms less effective overall. We study the
latter dimensions of regulation.
Gjalt de Jong is in the Faculty of Economics and Business, University of Groningen, The Netherlands. Arjen van Wit-
teloostuijn is in the Department of Organization and Strategy,University of Tilburg, The Netherlands.
Public Administration Vol.93, No. 1, 2015 (34–51)
© 2014 John Wiley & Sons Ltd.
REGULATORYRED TAPE AND PRIVATE FIRM PERFORMANCE 35
Regulation studies in economics often apply indicators constructed by the OECD or
World Bank, typically studying country- or industry-level phenomena. Djankov et al.
(2008), for example, suggest that the growth of per capita GDP is negatively correlated
with an aggregate index of business regulations in areas such as starting a business and
getting bank credits, and Alesina et al. (2005) nd that regulatory reforms are associated
with increased investments. However, an ongoing debate questions the usefulness of
these indicators for policy design. Muhlerin (2007), for instance, concludes that the two
leading regulatory models in economics (i.e. public and special interest theories) have
contrasting underpinnings that complicate empirical research, next to and on top of issues
related to confounding events and imprecision in data due to the lengthy and noisy nature
of the regulatory process.
Our rst contribution is that we complement these country- and industry-level studies
with a rm-level analysis, using new perceptual measures from a sample of private rm
managers. As convincingly argued in the business literature (Lang et al. 1997), managers of
private rms form cognitive maps based on perceived information and events, which sub-
sequently impact the rms’ strategic decisions. Similarly,the importance of perceptions is
emphasized in studies of red tape in public administration (Rainey et al. 1995), as well as
in research on political processes (Yackee 2012). For instance, a large number of studies
investigate managers’ perceptions of red tape, and how these perceptions are related to
organizational commitment, job satisfaction, public service motivation, and performance
(Feeney 2008; Bozeman and Feeney 2011),building on the National Administrative Studies
Projects (NASP) in the USA.
The value of reliance on perceptions for studying red tape is highlighted in recent work
by Moynihan et al. (2012). The crux of their argument is that perceptions of red tape make
a difference because ‘the experience and effects of red tape may be somewhat mutable…
Even if the rules that give rise to red tape cannot be changed, managerial actions can alter
the organizational context in ways that change how employees experience red tape, and
how they subsequently respond’ (Moynihan et al. 2012, p. 316). Although private rms
are included in the NASP projects, the majority of the NASP respondents work in public
organizations. We complement this literature by focusing on private rms in a country
other than the USA.
Our second contribution concerns the conceptualization and measurement of regula-
tion. Most regulation research in public administration relies on the conceptualization
introduced by Bozeman (2000), dening red tape as ‘rules, regulations, and procedures
that remain in force and entail a compliance burden but do not serve the legitimate pur-
poses the rules were intended to serve’ (p. 12). Hence, red tape is negative by denition,
which is directly reected in the measures of red tape (DeHart-Davis and Pandey 2005).
This approach is increasingly challenged in methodological debates within the red tape
research community (Bozeman and Feeney 2011). Our study complements redtape analy-
ses of organizational performance not only by using another source of regulation (that
is, rules issued by governments rather than by organizations themselves), but also by
applying regression analysis to estimate the effects of a neutral and multi-dimensional
conception of regulation on performance.
In order to achieve this, we (a) differentiate between regulation cost, change, and
inconsistency, and (b) use separate measures of these dimensions and rm performance.
With recent work in public administration research (e.g. Moynihan et al. 2012), we share
the view that perceptions of red tape matter. We focus on red tape that may originate
in three aspects of external regulation: perceived red tape due to the cost of regulation,
Public Administration Vol.93, No. 1, 2015 (34–51)
© 2014 John Wiley& Sons Ltd.
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