Policymakers should use regulations that encourage competition by keeping the overall regulatory burden low so that new businesses can enter and compete with existing businesses (Utah State University, 2021). While entrepreneurs are hailed as the key to innovation and growth, often in industries where these benefits are most desired, governments add regulations that may handicap entrepreneurs and dampen these benefits. Given the importance of both entrepreneurship and regulation to improving social outcomes, it is imperative for entrepreneurship scholars and policy makers to better understand these countervailing forces of free entry and regulation (Scott, 2013).

The regulatory environment is now the top issue than have the most impact on a company, according to 400 U.S. CEO across all major industries surveyed by Forbes Insights and KPMG. Thirty-four percent of CEOs are spending more time with regulators or government officials (Thought Leaders, 2014).

Tax policy has extraordinarily potent effects on entrepreneurial action. Capital gains taxation affects the share of profits retained and therefore influences the supply of risk capital. Limiting the deduction of investment losses depresses investment, especially given the steep mortality rate of new ventures. At the corporate level, policies that provide tax credits during years of losses increase cashflows and encourage investment. To promote entrepreneurial action, policy needs to change the after-tax payoff structure for both human and financial capital, making gains more attractive and losses less painful (Lerner & Sahlman, 2012).

New business creation is a prominent feature of the entrepreneurial process. Many studies have demonstrated the positive effects of new business creation on economic growth and development. New established business tends to be more efficient than older businesses, and the competitive pressure that they exert on other businesses enhances overall productivity and economic growth. New businesses also play much more of a role in job creation than older, more established businesses. Therefore, regulations that inhibit the creation of new businesses can be harmful (Munemo & Chambers, 2017). 

Dustin Chambers (Sr. Scholar) and Jonathan Munemo (Economics - Associate Professor, Salisbury University, USA) looked at the effect of business entry regulations and the quality of a nation’s governmental institutions on entrepreneurship. They found that new business creation is significantly lower in countries with excess barriers to entry, a lack of high-quality governmental institutions, or both. If a nation wants to promote entrepreneurship, it should prioritize reducing the red tape required to start a new business and improve regulatory quality (Munemo & Chambers, 2017). 

Study Design

The study examined the impact of start-up regulations and institutional quality on the level of new business activity in 119 countries between 2001 and 2012. Entrepreneurship is measured using a World Bank standard called new business entry density.  The study uses indices for six dimensions of institutional quality from the World Bank’s Worldwide Governance Indicators database: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. Each dimension is measured on a five-point scale from -2.5 to 2.5, with higher values corresponding to better outcomes. The results are estimated in terms of the effect of a one-standard-deviation change in institutional quality. The standard deviation measures how widely data are dispersed from the average, or mean, of the data. Data that are clustered closer to the mean will have a smaller standard deviation; a larger standard deviation signifies more widely dispersed data (Munemo & Chambers, 2017).

Conclusion

If any Country, Nation, Province and/or State, wishes to promote higher levels of domestic entrepreneurship in both the short and long term, top policy priority should be given to reducing barriers to entry for new businesses and improve overall institutional quality (Munemo & Chambers, 2017).