Does Red Tape Hold Back Entrepreneurs? Evidence from Portugal

In 2005, Portugal introduced a business registration reform - the On the Spot Firm program - with the goal of promoting the establishment of new start-ups and, ultimately, stimulating investment and economic growth. However, the question remains as to whether this policy has successfully achieved these goals. In this paper, we exploit the fact that the registration reform was introduced in different counties at different time periods (between 2005 and 2008) and use unique detailed micro-level data to examine the effects of deregulation in start-ups entry, performance and survival. The results show that the program increases the number of start-ups by approximately 17.2 percent and creates seven new jobs per month, county and 100,000 inhabitants in eligible industries. However, this increase is driven by young, female, less educated and less experienced individuals who decided to open non technology-based businesses, particularly agricultural, retail trade and construction firms. Additionally, we also find that start-ups established after the program are smaller and less likely to survive in the first two years than firms founded in counties without this program. Overall, we find some evidence that former entry regulation inhibits low ability individuals from establishing firms, acting as a screening mechanism to low quality ideas, as suggested by public interest theory.