September 21, 2014

Red Tape Isn’t Getting Any Cheaper – and Other Interesting Research

It’s inconvenient that, most of the time, small-business research releases are pretty random and don’t fall neatly into thematic boxes on a monthly basis. September 2010 was no exception.  But, if you held a gun to my head and forced me to name a theme for the month anyway, I’d say the major research releases were all about expectations — things that are (or are not) as good (or as bad) as we thought.

U.S. (ALMOST) LEADER OF THE PACK


First, we get a bit of really, truly big picture stuff, thanks to Global Entrepreneurship and the United States (PDF), a report that compares 71 different countries on various measures of entrepreneurship. The yardstick with which they conduct these measurements is called the Global Entrepreneurship and Development Index, which was developed by the researchers for that purpose.

So, overall, the U.S. is ranked third overall (behind Denmark and Canada). There are three separate areas for rank, which might be called the Three As: Attitude, Activities and Aspirations. And these separate evaluations reveal some weaknesses in entrepreneurship that some folks might find surprising.

For example, while the U.S. is a leader in startup skills, in competition and in developing new technologies, we begin to fall down when it comes to the tech sector, to cultural support for entrepreneurship, and to high-growth business.

The researchers suggest that one reason why the U.S. may appear to be experiencing a slowdown in entrepreneurial activities compared with the rest of the world could be because the rest of the world, having studied the U.S. model, is catching up with us.

That is certainly possible but I think it’s equally possible that some in this country — and certainly some among our nation’s leaders — might talk a lot about how much they love entrepreneurship but, in reality, they don’t have the stomach for that much risk. I think the U.S. has gotten used to being big and powerful and is now inclined to rest on its laurels.

And we will, too … right up until we find ourselves eating Singapore’s or New Zealand’s dust.

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WHAT’S SO SPECIAL ABOUT YOUNG FIRMS, ANYWAY?

Young business firms and startups

The Kauffman Foundation is still jumping up and down and yelling about new and young firms and job creation, which makes sense because they are pursuing an entire series of research papers under the heading Firm Foundation and Economic Growth.

The latest entry in that series, also released last month and entitled Neutralism and Entrepreneurship: The Structural Dynamics of Startups, Young Firms, and Job Creation, explores the structural reasons why those new and young firms are so central to job creation. The data used in this study, which comes from the Census Bureau’s Business Dynamics Statistics dataset, examines U.S. firms from 1977 through 2005. Only employer firms are included in the study, for fairly obvious reasons.

It turns out that the domination of new and young firms in the job creation landscape has been a pretty stable feature of the U.S. economy for the past 30 years. One part of the reason for that is simply that new and young firms are by far more numerous that older companies.

Meanwhile, as companies age, they also decline in number because of mergers, acquisitions, business failures and closures. However, over the past 20 years, these surviving firms have been responsible for more net job creation than that from firms that open and then close.

All of this creates a structure within which incidents (such as high-growth gazelle phenomena) play out. However, the researchers cite the dramatic reduction of costs of entry to suggest that the underlying dynamic may be changing. The rate of firm formation may be dramatically increasing.

Of course, from my point of view, it already has but this research will not show that because it does exclude nonemployer firms. With the underlying stability that exists among employer firms, however, the explosive growth of nonemployers over the past decade becomes even more interesting — at least, it does from my point of view.

It’s too bad there is no research to examine that trend.

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RED TAPE ISN’T GETTING ANY CHEAPER

Regulatory costs and small business

Every five years or so, the SBA Office of Advocacy releases an updated report on the costs of regulatory compliance for small businesses. Last month, during which Advocacy celebrated the 30th anniversary of the Regulatory Flexibility Act, they released the 2010 report.

The findings in this latest release are consistent with all the previous research that established that small businesses bear a disproportionate burden of regulatory cost compliance.

Overall, compliance federal regulations costs businesses roughly $8,086 per employee. However, firms with fewer than 20 employees pay an average of $10,585 for regulatory compliance costs, compared to $7,454 per employee for firms with between 20 and 499 employees, and $7,755 per employee for large firms with over 500 employees.

The research then divides firms into five industry sector categories: manufacturing, trade (retail and wholesale), services, health care, and other (a “residual category” for everybody else).

They found the difference between per-employee regulatory compliance costs to be the most stark in the manufacturing sector, where small firms pay 110% more per employee than medium sized firms and 125% more than large ones ($28,316 per employee, versus $13,504 and $12,586, respectively).

On the other hand, the differences in firm size class-specific regulatory compliance costs in the services sector were found to be minor; small firms pay only 13% more than medium sized firms, and they actually spend almost 10% less per employee than large firms. All other categories of industry sector fell between the two extremes.

Oh, and tax compliance costs for small businesses are 206% higher per employee than they are for large firms. All things considered, one might argue that tax compliance is the largest share of tax costs for firms with fewer than 20 employees.

Which means that lower tax rates is fine and all but tax relief for the smallest businesses is incomplete without simplification, which would reduce those compliance costs.

Of course, this is just the sort of helpful but unsexy issue that a politician wouldn’t dream of discussing … not when they can be talking about an opponent’s unorthodox domestic relations or terrifying plots against American-ness.

But that’s another blog post, isn’t it? :)

7 Comments ▼

Dawn R. Rivers


Dawn R. Rivers Dawn R. Rivers, an award-winning small business journalist, regularly reports and analyzes small business policy and research as the publisher of the MicroEnterprise Journal. She also publishes research at the Microbusiness Research Institute and she blogs at The MicroEnterprise Journal Blog.

7 Reactions

  1. Dawn- You’re right, red tape is getting more costly by the year. At one time it was reported, for example, that it cost small business more to get their taxes prepared than they actually paid in taxes. Regulations and red-tape sometimes can be good, but what is the cost in unintended consequences?

  2. Dawn,

    Thanks for this post! Could you list individuals who are fighting against the red tape?

  3. I believe that government regulation is one of the biggest concerns for those considering starting a new business or adding employees. One of the best things the government could do is get out of small business’ way.

  4. @Kip

    Thanks for the props, although I would say that some regulations are necessary but red tape is never a good thing. Bureaucracies are so inherently inefficient themselves that everything they generate tends to be inefficient, too — especially processes and procedures. Rulemakers should keep that in mind but, somehow, they never do.

    @Martin

    Hiya! The top guy, whose actual job it is to fight against the red tape, is the Chief Counsel of the SBA Office of Advocacy. The current holder of that position is Winslow Sargeant, who was finally able to assume the office when President Obama got tired of certain Senate Republicans yanking everybody's chains over the nomination and proceeded with a recess appointment. Other small business advocates fighting the red tape include organizations such as the National Federation of Independent Businesses, the National Small Business Association, the National Association for the Self-Employed and Women Impacting Public Policy.

    @Robert

    Actually, while regulatory compliance costs and paperwork are major concerns for existing firms (and certain is often an impediment to job creation), it has been my experience after conducting legions of interviews with microbusiness owners, that they rarely consider the regulatory stuff before they start businesses — unless they have previous management background. In some ways, that's unfortunate because I suspect a lot of businesses fail because of that lack of experience and because people find they've bitten off more than they can chew.

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