The Impact of Regulations on Small Firm Characteristics

Abstract

Regulations are shown to have a significant impact on entrepreneurial activity, especially on startups by smaller firms. Higher compliance costs are shown to deter small firms entering a new industry. In this study, using state-level regulation data in the U.S., we examine whether different types of regulations (including “health and safety regulations”, “employment regulations”, “tax code”, “licensing regulations”, “environmental regulations”, and “zoning regulations”) in each state deter smaller firms to do business in that state. We also examine whether each type of regulation deters firms to do business in certain industries or to operate in more or fewer states. Besides size, operational area, and industry, we also examine whether each type of regulation deters younger firms to do business in each state.