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Understanding the firm-level effects of regulation on the growth of small and medium-sized enterprises

Lookup NU author(s): Dr Oliver Mallett


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Small and medium-sized enterprises (SMEs) represent an important part of the UK economy. The impact of regulation on these firms is important to understand, especially amid frequent claims that SMEs are disproportionately affected by regulatory costs and that regulation may hamper business growth. We searched major databases for relevant empirical research on the firm-level effects of regulation on SME growth. This search generated a return of 1431 papers for which 101 articles were analysed in detail, producing a list of 38 relevant empirical studies. Key findings There is still very little firm-level empirical evidence of the effects regulation has on SME growth. The key findings encompass the following themes: Perception A persistent feature of the studies reviewed is their reliance on owner-manager perceptions of the impacts of regulation. Regulation tends to be reported as a barrier to firm-level growth although rarely is it identified as a principal hurdle. In more detailed studies of owner-manager perceptions, stability emerges as a powerful aspect, emphasising the perceived demands for the reliability and continuity of regulation. This is particularly relevant to entrepreneurs’ considerations about the feasibility of business growth through bringing new products and services to the market. Correlation There has not yet been much work focused on identifying correlations between regulations and firm-level growth effects. Initial firm-level studies identify no significant differences in SME growth between low and highly-regulated economies. Studies on property rights and corruption do indicate the necessity of regulation to create a sense of stability and security. A lack of stability and security can inhibit entrepreneurs’ growth aspirations. Threshold effects Where small firms receive specific exemptions from regulation they are less likely to grow beyond the threshold at which these exemptions are lost. These effects may also influence particular practices such as outsourcing, deployed by firms to maximise their opportunities and profits whilst maintaining their exemptions. Informal economy Many studies on the firm-level effects of regulation on SME growth rely on official sources and ignore those businesses not registered for tax purposes. The inclusion of these firms accounts for a lack of firm-level differences between high- and low-regulation economies. Future Directions The report identifies 3 key areas to attend to in future research: 1. Over-reliance on the ‘SME’ label masks differences between firms that can be important for understanding the impacts of regulations on business growth. Adapting earlier research, we suggest seven dimensions to help usefully characterise SMEs: product market; labour market; resources; strategic choice; rules and routines; management style; and networks. This attention to the heterogeneity of SMEs allows researchers to identify how regulations might have effects on different types of firm but also where particular regulations may be relevant or have disproportionate effects on firm growth. 2. The effects of regulation are multiple. Adapting earlier research we suggest a typology of the firm-level effects of regulation on SMEs. This highlights considerations such as differences in how relevant regulations are to particular firms, the ways that firms respond to regulations, knock-on effects and the role of regulations in shaping the broader operating context for firms. 3. Understanding the impacts of regulation on firm-level SME growth will benefit from greater use of longitudinal research designs. Such research designs are sensitive to how firms change and are affected by regulation over time. This is particularly important when considering effects on SME growth as the relevance and impacts of regulations upon particular firms can vary as those firms themselves change. Conclusion While cutting red tape and bureaucracy is broadly welcomed as beneficial for business growth, there is very little evidence demonstrating how or when it impacts on SME growth at a firm level. It is necessary to fully understand these effects in terms of their dynamic, direct and indirect influences in order to appreciate both the ways in which they may constrain but also facilitate SME growth. Without this understanding, well-intentioned attempts to support these firms and growth-oriented owner-managers and entrepreneurs may be doomed to failure.

Publication metadata

Author(s): Mallett O, Wapshott R, Vorley T

Publication type: Report

Publication status: Unpublished

Series Title:

Type: Commissioned government report

Year: 2018

Acceptance date: 26/08/2015

Institution: Department for Business, Innovation and Skills