The Regulatory Environment and SMMEs. Evidence from South African Firm Level Data

This paper investigates the impact of government regulation on fi rms in general, and SMMEs in particular, using four independent cross-sectional surveys. It specifi cally examines: labour regulations and their relationship with employment and investment; trade regulations; permits and licences for businesses; visa regulations; the predictability of regulatory application; and the costs of regulation. It also investigates the ways fi rms respond to regulations. Labour market regulations are the most often mentioned regulatory constraint to business and are mentioned as often as obstacles such as the availability of skilled workers, crime and theft, and macroeconomic instability. There is evidence that these regulations constrain fi rm growth, particularly among smaller fi rms. The unskilled in smaller fi rms are most likely to lose their jobs due to these regulations. Labour regulations are not the only type of regulations that have a disproportional effect on smaller fi rms. The cost of complying with tax regulations, in terms of the cost per worker, is much larger for smaller fi rms. Smaller fi rms are also more likely to identify tariff barriers as too high. A common fi nding throughout the paper is that it is the administrative burden and time costs associated with regulations rather than the direct monetary costs that are the most costly. Government regulation comes in many forms, such as tax regulation, labour regulation and regulations concerning the import and export of goods. These regulations have both costs and benefi ts, which government must balance. This paper uses data gathered from a number of South African fi rm-level surveys to investigate how government regulations impact on fi rms. A particular focus is on how the impact of regulations differs by fi rm size. Regulation is a broad area that impacts on fi rms in many different ways. This paper does not try to investigate all the different aspects of regulation, but instead focuses on those regulations fi rms mention as the most onerous. Furthermore, because the information is drawn from existing fi rm-level surveys the types of questions that can be investigated are constrained by the questions asked in these surveys. In many cases fi rms are asked about the perceived impact of regulations. Of course, perceptions matter, especially if managers base decisions on whether to invest or change employment on these perceptions, but where possible, we have attempted to examine the link between regulations and measurable fi rm responses. The paper starts off by providing an overview of the fi rm-level datasets used. Where possible, it reports on the sector and size breakdown and compare the size distributions of fi rms in each of the samples. In Section 2 we examine whether fi rms perceive government regulation to be a serious obstacle to business and whether regulation is perceived to be as serious an obstacle as other obstacles fi rms face. This places regulation in context. The third section of the paper investigates the link between government regulation and investment. Investment is important because it allows fi rms to increase production and scale, reduce costs and acts as a conduit for technical and productivity improvements. In competitive and dynamic markets fi rms that do not invest risk losing market share. In Section 4 of the paper the relationship between regulation and employment is examined. In particular, the impact of the labour market regulations introduced in the mid-1990s is evaluated. We investigate the impact of these regulations on fi rm growth and whether they affect certain classes of workers disproportionately. In this section we also look at whether fi rms perceive any benefi ts to labour market regulation. The fi fth section investigates the impact of trade regulation on SMMEs. The sixth section considers regulations concerned with the granting of business licences and permits. Section 7 examines other aspects of regulations, such as visa regulations and the predictability of regulations. The eighth section of this paper deals with the specifi c cost of regulation to the fi rm. This section specifi cally examines the staff time costs of complying with regulations and the costs of outside advisors and consultants. The last section concludes.