Government Regulations Hamper Growth of Small Businesses

Posted by: on Feb 4, 2012 | One Comment

Being an ardent supporter of the free market, I had always known that government interventions curb entrepreneurs’ innovativeness, thus leading to fewer opportunities for all. Data from the World Bank Group Entrepreneurship Survey (2008) proves it. World Bank economists said that there was a relationship between ease in establishing business and greater entrepreneurial activity.


Not only do entrepreneurs engage in fewer business endeavors, but their performance is also hampered by regulations. Researchers have found that, in Mexico, the effort to simplify business formation increased employment by almost 3%!


Why Are Government Regulations a Problem?

Most economists, including Nicole and Mark Crain from Lafayette University, believe that government regulations harm businesses in the following ways:•

  • The need to comply with regulations adds to the cost burden of small businesses. The Crains estimated that the per member rate of Federal regulations compliance for small business houses with about 20 employees could exceed $10,585. However, businesses with about 500 members spend only $7,755!


  • Regulations tend to make business houses less competitive in the foreign market. The Crains explicated that regulations lead to “inefficiencies in the structure of American enterprises”. This adversely impacts the competitiveness of companies internationally. They also claimed that this situation leads to businesses relocating to places that have less government interventions.


  • Predicting the impact of regulations is difficult. This uncertainty discourages business owners from investing and recruiting. Therefore, the purchase of equipment or addition of workers keeps getting delayed.


  • New regulations may have inadvertent consequences. For instance, the healthcare law that was introduced in the US in 2011 required business houses to submit 1,099 forms, from 2012 onwards, for a payment of more than $600 made to one payee. The endeavor to boost health insurance coverage led to unrelated tax filings, which imposed heavily on small businesses. The outcome surprised even the Congress, the party that had voted for the law.


Due to the complaints from small business owners, American federal agencies announced several plans to reduce regulations. To this end, several changes were proposed in the 21st Century Regulation initiative. Some of those changes include the elimination of export barriers and duplicative requisites. The US government also decided to abolish the 1.9 million yearly hours of unnecessary reporting necessitated by employers. This, itself, has the potential of saving $40 million in yearly costs!


It is onerous burden of government regulations specially those impacting small businesses that have kept Indian poor and its regulations like Nepal and Bangladesh.


The Indian leaders too must think on the lines of reducing the burden of governmental regulations on small businesses. What do you think about this?


1 Comment

  1. aashi
    February 7, 2012

    very well written………..more regulations hence more problems for small businesses.


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