Beyond labor policies
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Finance and electricity are among the top constraints faced by formal private enterprises Firm size
Constraint
Small
Medium
Income level Large
Low
Lower middle
Upper middle
High
All
Access to finance Power shortage Lack of skills Informal competition Tax rates most severe
second-most severe
third-most severe
Source: IFC, forthcoming. Note: The analysis is based on World Bank enterprise surveys covering 46,556 enterprises in 106 countries. Small firms have fewer than 20 employees, medium firms have 21–99, and large firms 100 and more.
rural areas, it can significantly increase women’s employment.14 Telecommunications allows for better information flows among suppliers, producers, and customers, and the Internet and mobile technology facilitate the spread of new ideas. Roads provide greater access to markets, as do ports and airports.15 In many low-income countries, poor-quality infrastructure is an especially severe challenge. Part of the problem stems from how infrastructure services are regulated, however, and not only from insufficient resources to build additional facilities and roads. By one estimate, improved infrastructure was responsible for more than half of Sub-Saharan Africa’s recent growth.16 But efficiency improvements stemming from better management of spending and maintenance, pricing policies, and regulations would be needed to close a significant portion of the remaining gap in infrastructure services. In many countries and infrastructure sub-sectors, monopolies—based on political connections— have resulted in lower quantities of services being provided, at higher prices and of lower quality than in areas where competition has been allowed to thrive.17 Regulation is another area that influences the opportunities for businesses to grow. Some regulations determine the rules of the game, encouraging—or discouraging—certain activities. Others affect firms at various stages of their life cycle, from getting started, to enforcing contracts, to closing down.18 Regulations impact on the cost of doing business, both in monetary
terms and in time needed to comply. Steps taken to meet requirements or to pay fees are a burden to businesses, as are delays in receiving permits or licenses. The time it takes to comply with regulations or to receive permits varies greatly across firms in the same location, suggesting discretionary power and corruption.19 Beyond these broader cost measures, regulations affect the types of opportunities that are available and how widely they are available. Regulations can relieve or exacerbate uncertainty and corruption, but they can also have a deeper influence on the degree of competition and thus the structure of industries in the economy. Because business regulations affect the degree of competition, they shape the pressures to innovate and increase productivity. Competition contributes to the reallocation of resources from inefficient activities to more productive ones. Regulations that serve to protect an industry or deter new entrants can be particularly costly in terms of forgone output and employment growth.20 Across countries, regulations on business entry are inversely correlated with productivity and firm creation, with stronger effects in sectors that tend to have higher turnover rates.21 Easing entry requirements helped increase business registration and employment and drove down prices for consumers in Mexico. The effect was achieved largely through creation of new firms rather than formalization of existing informal firms.22 Combining relaxed entry requirements with other regulatory reforms, such as investment promotion and trade