The impact of regulation on Australian businesses Abrie Swanepoel Manager Industry & Firm Analysis Industry Economics Branch Office of the Chief Economist 15 September 2015

Regulation impacts on firms depending on their activities, size, location and stage of development Most firms face regulation of some form For some firms, there are added layers of complexity Firm decisions reflect a variety of incentives and barriers, including regulation Upwards of 60 licensing obligations according to ABLIS Construction start up example Set up, business as usual, expansion and closure Business life cycle 23% of firms sell interstate 8% sell to overseas markets Geographic market for goods and services Firms face both direct and indirect compliance costs Costs A business perspective on regulation

Firm perceptions vs. reality Firms cite labour/IR as main regulatory barrier, but regulation ranks low relative to other factors as hiring constraint Labour/IR regulation is primary regulatory constraint for businesses in general Finance/tax legislation is primary regulatory constraint for SMEs Benefits of regulation are ignored Australia’s international ranking mostly favourable Main constraint on hiring workers Source: National Australia Bank

Regulation affects business activities, but… Businesses perceive regulation has wide- ranging impacts Almost all firms that were surveyed were impacted by regulatory burdens. The most direct impacts were most cited by firms. Other important impacts include: Added uncertainty Time wasted Investment delays Regulation’s impacts on firms Source: National Australia Bank

…other factors play important role as well Many factors besides government regulations or compliance impact on general business activities Around 13 per cent of businesses in general cite regulation as a barrier. Weak demand, access to funds, input costs and lack of skilled persons are of most concern. Results vary by industry and firm size. Cyclical effects impact on perceptions. Regulatory and other barriers to general business activities Source: ABS Cat. No

From perceptions to empirical evidence Literature illustrates regulation has impacts on the behaviour and performance of firms Dynamics of firm renewal and resource reallocation across firms and sectors has macroeconomic implications. Due to restrictions on data availability, much of the evidence is based on cross-country analysis. Regulatory impacts on key economic aggregates Business dynamics Can be detrimental to start ups Force entrants to be larger PC found low barriers to set up/transfer/ closure in Australia Productivity PMR and LMR matter for TFP Distance from technological frontier matters Impact varies over the business cycle Economic growth Reduces growth and increases volatility Impacts depend on quality of the overall institutional framework Starting point matters as well

What can we learn from the data and empirical studies? Five key messages 1 Regulation has the potential to impact on firms in various ways 2 Differing impacts depending on industry, firm characteristics and location 3 Perceptions of regulation do not necessarily align with reality 4 Measuring regulatory impacts is fraught with challenges 5 Impacts of reform depend on country-specific factors

Australian Industry Report 2015 Department of Industry and Science Abrie Swanepoel Manager Industry & Firm Analysis Industry Economics Branch Office of the Chief Economist Phone: Further information Contact Details