The Impact of Regulation on Small Business Performance: Understanding and Capturing the Direct and I

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The Impact of Regulation on Small Business
Performance Understanding and Capturing the
Direct and Indirect Effects of Regulation

• Adding Up The Costs Benefits
• DTI/BRE Conference on the Evaluation of
  Regulation
• (24 November 2006)

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Engaging with the Better Regulation Agenda

• Impact of regulation on small businesses the
  debate to date has been problematic
• evidence base is largely based on survey data
  that simply describes small businesses views on
  whether regulation acts as a barrier to business
  performance.
• Likelihood that these data exaggerates the impact
  of regulation on small business hence may
  exaggerate the potential impact of better
  regulation policy
• UK regulatory environment business friendly in
  an international comparative context
• Focus on costs constraints - regulation confers
  benefits as well as imposing costs and
  constraints

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Objective of the Research

• First, to stimulate and contribute to a debate
  around the current policy agenda on Better
  Regulation.
• Research was designed to complement existing
  knowledge by providing a deeper understanding of
  why and how regulation affects small business
  performance.
• Second, it is intended to raise awareness of new
  and different policy options that might well be
  developed to complement existing policy.

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Research Method

• Based on an intensive research methodology within
  a critical realist approach.
• Data obtained from face-to-face interviews
  semi-structured interviews 124 small and
  medium-sized business owners and managers
• Wide range of sectors and several locations in
  England.

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Key Findings

• Regulation is perceived as something additional
  and external to the market this
  conceptualisation is fundamentally wrong.
• Regulation is an integral component of advanced
  market economies without regulation modern
  economies simply would not function.
• Effective regulation is a necessary precondition
  for the operation and development of an advanced
  market economy, e.g., property rights, financial
  and labour markets .. such regulation
  presupposes an active government role.

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Key Findings (contd..)

• The nature of the relationship between regulation
  and business performance is multi-layered and
  subtle.
• Appreciating this complexity is vital to the
  development of properly evidence-based policy.
• It is a mistake to understand regulation simply
  as a constraint on small business performance ..
• Regulations also generate enabling and motivating
  tendencies that influence, though do not
  determine, performance outcomes.

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Enabling Tendencies of Regulation

• enablements are regulatory influences that make
  certain actions possible
• .for example, regulation aimed at creating a
  level playing field enables businesses to
  compete with existing producers, thereby
  stimulating greater market competition

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Motivating Tendencies of Regulation

• motivators are regulatory influences that provide
  an incentive to business owners to act in
  particular ways rather than others
• .for example, regulation aimed at creating a
  level playing field motivates existing
  producers to implement product and process
  innovations to maintain a competitive advantage
  over existing and/or new producers

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Constraining Tendencies of Regulation

• constraints are regulatory influences that limit
  the scope for small business owner action
• for example, regulation aimed at creating a
  level playing field constrains existing
  producers by opening up the marketplace to new
  competitors.

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Owner-Manager Perspectives

• What owner-managers say about regulation and what
  they do.
• We are getting hammered left, right, and centre
  in industry by all this legislation, all this
  bureaucratic thing (Construction Company)
• yes, its challenging, particularly around the
  Disability and Discrimination Act and Employment
  Rights, but I cant argue that they shouldnt be
  there its my duty of care. But its
  disproportionate and I havent got the personnel
  its so time consuming and it takes me away
  from strategic issues for the business (Media
  Consultancy)

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Owner-Manager Perspectives

• .There are two ends of regulations for us
  the regulations that affect the running of the
  business and there are the regulations that
  present opportunities to us and the opportunities
  scale is the one we run with all the time. The
  other end we get over it and get on with it
• We do rely heavily on regulations creating the
  market for us.... (Marine Safety Equipment
  Manufacturer)

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Therefore

• Regulation is not enabling, motivating or
  constraining per se but only in relation to
  business owners specific goals and capacities.
• In practice, regulation generates multiple and
  often contradictory, tendencies and has variable
  effects on small business performance.
• This differentiation reflects the highly variable
  motivations and resources of individual
  businesses.

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Direct and Indirect Influences of Regulation

• From the point of view of the individual business
  owner, enablements, motivators and constraints
  can operate directly and indirectly.
• Direct influences arise from the obligations
  regulation places on small business owners and
  the incentives this gives to them to adapt
  business activities to cut costs or increase
  trading revenue.
• Indirect influences arise from the adaptations of
  other stakeholders whose actions causally affect
  small business owners to behave in certain ways
  (competitors, customers, employees, suppliers,
  infrastructure providers and regulatory
  authorities).

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The Link to Policy

• Research explains the effects of regulation on
  business performance as outcomes that tend to be
  realised, but which do not always occur in
  practice.
• The particular outcomes experienced depend on
  both the nature of the regulation involved and
  the conditions that affect its expression.
• These conditions may include e.g., interest
  rates or the state of the labour market,
• They inevitably also involve the different
  motivations, resources and capabilities of
  individual businesses.

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The Link to Policy (contd)

• This multi-layered form of explanation is
  important because the outcomes produced can be
  influenced either by changing the regulation
  concerned or by changing the conditions involved.
  
• To date, policy has focussed almost exclusively
  on the first of these options. However, this
  study has shown quite clearly that the second
  option has considerable potential.

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Policy Implications Business Support

• Policymakers must recognise there will not be a
  single small business effect of regulation but
  many different ones.
• Small enterprises operate in every sector of the
  UK economy and in widely different conditions,
  suggesting a variety of strategic responses to
  particular regulations dependent on
• ... business owners capabilities, resources and
  objectives and on differences in market
  conditions that enable, motivate and constrain
  their actions.

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Policy Implications Business Support (contd.)

• These variations in owners capacities and
  motivations opens up space for policy to
  intervene to improve business owners
  capabilities.
• New forms of businesses support designed to
  encourage and enable businesses to deal more
  positively with regulation can make a major
  contribution to achieving fundamental policy
  objectives i.e., Better Regulation

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Some Final Thoughts

• More emphasis should be placed on capturing the
  indirect influences on small business
  performance.
• Regulations that constrain small business owners
  by placing obligations upon them, might also
  constitute enablements and motivators for them
• . and for other small businesses to adapt
  products and processes in order to reduce costs
  and/or increase trading revenues (e.g., new
  markets)