Skye Root ECON March 2009

Game Plan Central Question Background Data Method/Model Results Policy Implications Questions?

Central Question How does the existence and/or overall success of the executive, legislative, and judicial branches of a countries government affect regulation of entry for entrepreneurial start-up companies?

Background Mexico (2006) Literature Review

Data-Overview 1999 “The Regulation of Entry” paper by Simon Djankov 85 countries of all political shapes and economic sizes are represented in the data compilation. The principle sources of information were the World Bank, the CIA website, USAID, and international law firms in each country.

Data-Variable Definitions VariableDescription Number of Procedures Time Cost (E) Executive de facto independence (E) Constraints on executive power (L) Effectiveness of legislature The number of different procedures that a start-up company has to comply with in order to obtain a legal status, i.e., to start a legal entity. The time it takes to obtain legal status to operate a firm, in business days. A week has five business days and a month has twenty-two. The cost of obtaining legal status to operate a firm as a share of per capita GDP in Index of “operation (de facto) independence of chief executive.” Descending scale from 1 to 7 (1=pure individual; 3=slight limitations; 5=substantial limitations; 7=executive subordination). Average of the years 1945 through Index of constraints on the executive power based on the number of effective veto points in a country. Veto points include (1) an effective legislature; (2) an independent judiciary; and (3) a strong federal system. Average of the years 1945 through Index of the effectiveness of the legislature. Ascending scale from 1 to 4 (1=no legislature; 2=largely ineffective legislature; 3=partly effective; 4=effective). Average of the years 1945 through (L) Competition in the legislature’s election process Index of the competitiveness of the nominating process for seats in the legislature. Ascending scale from 1 to 4 (1=no legislature; 2=noncompetitive; 3=partly competitive; 4=competitive). Average of the years 1945 through (P) AutocracyIndex of the “general closedness of political institutions.” Scale from 0 to 10 with 0 being the low in autocracy and 10 being the high in autocracy. Average of the years 1945 through 1998 (P) Political rightsIndex of political rights. Higher ratings indicate countries that come closer to the ideals suggested by the checklist questions of (1) free and fair elections; (2) those elected rule; (3) there are competitive parties or other competitive political groupings; (4) the opposition has an important role and power. Average of the years 1945 through (LO) Legal originIndentifies the legal origin of each Company Law or Commercial Code of each county. There are five possible origins: (1) English Common Law; (2) French Commercial Code; (3) German Commercial Code; (4) Scandinavian Code; and (5) Socialist/Communist laws.

Data-Summary Statistics VariableObservationsMeanStd. DevMinMax Procedures Time Cost Log procedures Log time Log cost Executive de facto independence Constraints on executive power Effectiveness of legislature Competition in the legislature’s election process Autocracy Political rights Legal origin-French Legal origin-Socialist Legal origin-English

Model/Methods OLS Model Dependant Variables: Procedures, Time, and Cost (LOG) Independent Variables: Exec, Leg, Judic, and Legal Orig. White Test for Heteroskedasticity (Robust Correction) Chow Test (partial F-test) Interaction Term (English Legal Origin + Legislature)

Results VariableLog ProceduresLog TimeLog Cost Executive de facto independence Constraints on executive power Effectiveness of legislature Competition in the legislature’s election process Autocracy Political rights Legal origin-French Legal origin-Socialist Legal origin-English Constant R² N Chow-All Political (F-stat) (p-value) Chow-Legal Origin (F-stat) (p-value) (0.1132) (0.0830) *** (0.0920) *** (0.1032) (0.0410) (0.4084) (0.1654) (0.2299) ** (0.1855) *** (0.5619) *** *** (0.1993) (0.1835) ** (0.1587) ** (0.2767) (0.0642) (0.6524) (0.2867) (0.3704) ** (0.3716) *** (0.9349) *** (0.3047) (0.2367) ** (0.3401) (0.5113) (0.1208) (1.0014) (0.4109) (0.6496) * (0.5163) (1.5543) ***

Results-Explained Procedures 1 unit effectiveness increase leads to 39.4% decrease in # procedures, and 1 unit competitive increase leads to 38.3% increase in procedures. Time Omitted Variable Problem English Legal Origin (78.6 % decrease in time) Cost Legislature and English Legal Origin again Multicollinearity between variables

Policy Implications The findings suggest that the judicial (legal origin) does not really affect unless English, the executive does not significantly affect at all, and that the legislative have a consistent significant effect regardless of assumptions or corrections. A more effective and competitive legislature is going to make it more expensive to start a company on average, but make the time and procedures less so. Simply put, a more democratic legislature will lead to less regulation of entry and ultimately to increased entrepreneurial activity.

Questions/Comments