Overview of Entrepreneurship and Regulation

A thriving entrepreneurial environment has been identified as a key deter­minant for the long-term growth of an economy (Acs and Audretsch 1988; Blachflower 2000; Klapper et al. 2014; Van Praag and Versloot 2007; Parker 2009; Landes et al.

Much of this research is also directed to understanding how to encourage and spur entrepreneurship and what conditions can burden entrepreneurs. Within this literature, the institutional environment has been identified as having a significant impact on the extent of produc­tive entrepreneurial activity (Baumol 1990; Djankov et al. 2002; Klapper et al. 2006; Coyne et al. 2005; Boettke and Coyne 2009; Bruhn 2011; Monteiro and Assuncao 2012; Bripi 2013; Branstetter et al. 2013; Boudreaux 2015; Sobel et al. 2007). This institutional environment includes such aspects as the protection of private property or intellectual property rights, as well as various regulations on business operations and requirements or licenses to starting a business. The regulation of business activity and entr y has been on the forefront of this research, and many empirical studies indicate that higher levels of regulations impede busi­ness activity, firm entry, and entrepreneurship (Klapper et al. 2006; Van Stel et al. 2007; Nystrom 2008; Ardagna and Lusardi 2010; Bripi 2013; Bailey and Thomas 2017).

Scholars have also discovered a new avenue of research investigating how regulation may impact different types of firms in different ways— specifically, empirical evidence suggests that regulation impacts small firms to a greater extent than large firms (Bailey and Thomas 2017; Cham­bers et al.

Furthermore, labor regulations are often cited as a type of regu­lation that can be particularly costly and burdensome, especially for nascent and young business entrepreneurship (Van Stel et al. 2007; Sobel 2008). Cumming and Li (2013) find that labor restrictions matter more than any other element in the Economic Freedom of the World index for creating new business startups. Labor market regulations can cause frictions and constrain entrepreneurs’ ability to make human resource decisions, thereby discouraging startup formation and growth. With labor laws such as minimum wage laws and overtime regulations, these contribute to added costs for small businesses. In fact, some empirical research has indicated that, while larger companies may better internalize the costs to business of higher minimum wages, it is more difficult for small businesses (Sabia 2006; Meer and West 2015).

Lastly, some of the public choice literature suggests that regula­tion may be promoted by incumbent firms in the industry who may successfully lobby officials to increase regulations in order to raise costs to smaller, competitor firms (e.g., Tullock 1967; Stigler 1971). With a similar concept, Pollman and Berry (2017) coin the term regula­tory entrepreneurship that refers to new technology companies that are pursuing a line of business where changing the law is a significant part of the business plan. Pollman and Berry contrast this with traditional lobbying because traditional lobbying efforts often seek to prevent or weaken cost-increasing regulations or protect incumbents from competi­tion. In contrast, regulatory entrepreneurs (with Uber as the well-known example), make an issue as publicly salient as possible, rally the public to their cause, and the use their popular support as a force to change the regulations (Tusk 2018). Following Pollman and Berry (2017), I discuss how the presence of regulatory entrepreneurship in Silicon Valley firms may be another avenue by which Silicon Valley firms may be less disadvantaged by industry regulation than Main Street firms. That is, while industr y-specific regulations may be hampering Main Street entrepreneurs, they may not be hampering some technology startups in the same way.

Thus, I draw on this literature on regulation and provide the theo­retical mechanisms and links for how regulations played out in practice and why regulation may be hindering some “small” businesses and not others.

in addition to the distinctions defined by Aulet and Murray, there is a similar distinction between opportunity vs. necessity entrepreneurship. Necessity entrepreneurs typically come from lower-income backgrounds and start a business because of “necessity” to survive.^[45] On the other hand, opportunity entrepreneurs start a company because they see a market opportunity and potential for growth. in one study that aims to discuss these differences in developing countries, Schoar (2010) refers to the opportunity entrepreneurs as the “transformational entrepreneurs” because they aim to create large, vibrant businesses that grow beyond their subsistence needs (58). The “necessity” entrepreneur is also referred to as “subsistence” entrepreneur because s/he becomes an entrepreneur as a means for providing subsistence income (58).

Schoar (2010) then goes on to discuss how policy differences in emerging economies impact these two types of entrepreneurs: for example, a “regulatory tax” might be more distortive for transforma­tional entrepreneurs in developing countries if officials are more likely to increase their demands on the large and successful firms while smaller firms stay under the radar. Most importantly, the author discusses how inefficient capital markets disproportionally harm transformational entrepreneurs, thus negatively impacting growth since transformational entrepreneurial ventures are more likely to be growth enhancing.

My contribution complements the work of Schoar (2010) and Aulet and Murray (2013) by providing another distinction—that between the Main Street and the Silicon Valley entrepreneur—and illustrating how regulations may impact these two groups in different ways.

Thus I provide the theoretical links and discussion of how regulations may impact Main Street firms differently than Silicon Valley firms by focusing on how they may experience differences in regulatory burden, regulatory compliance, and regulatory entrepreneurship.