2015_02_Productive+Entrepreneurship+and+Insolvency+Legislature.pdf (825.47 kB)
Productive entrepreneurship and insolvency legislature: A cross-country study.
It is possible to establish a link between insolvency procedures and entrepreneurship,
despite the fact that relatively little research has been carried out in this area. Empirical
studies show that less stringent insolvency law has a positive impact on entrepreneurship
and business development. The studies also indicate that more lenient insolvency
regulations can influence both the quantity and the quality of entrepreneurship by
encouraging entrepreneurs to start again, which often leads to the development of
successful businesses.
This empirical study is unique. It investigates the strengths of and the relationship between
different aspects of insolvency legislation and growth-orientated entrepreneurship in
particular. Entrepreneurship is a multifaceted phenomenon and the motives behind it and
its growth potential vary depending on the type of entrepreneurship. Some companies do
not have the intention to grow or lack the prerequisites to do so. The analysis is based on
data from the World Bank Cost of Doing Business index and, in particular, the Resolving
Insolvency sub-index, which measures the time, cost and recovery rate for creditors when a
company goes bankrupt. It is also based on measurements of entrepreneurship from GEM
(Global Entrepreneurship Monitor) and other independent institutes that collect data in a
standardised way.
A previous study of Japan by Eberhart, Eesley and Eisenhardt, researchers from Stanford
University, indicates greater causality between a reform of insolvency law in Japan and a
certain type of entrepreneurship (elite entrepreneurs). However, the current analysis uses
data from a large number of countries over time and provides robust measurements of a
variety of aspects of value-added entrepreneurship (innovative entrepreneurship, growthorientated entrepreneurship and opportunity-driven entrepreneurship), which means that
the results can more readily be generalised. All three indicators or measurements of
insolvency from the World Bank (time, cost and recovery rate) have a negative link with
opportunity-driven, high-growth and innovative entrepreneurship, despite the fact that the
relative importance of these varies. The cost dimension also has a negative influence on
necessity-driven entrepreneurship in OECD countries. This type of entrepreneurship is
different in nature and involves individuals being forced to become self-employed in order
to earn their living. This is in contrast with opportunity-driven, innovative and growthorientated entrepreneurship, which are regarded as being more important for OECD
countries.
An analysis of the data at a country level shows that more lenient insolvency legislation
can reduce the obstacles in the event of a company failing and, therefore, encourage
growth-orientated and innovative entrepreneurship. This result supports and reinforces the
conclusions drawn by Eberhart et al (2013) in their study of the Japanese reform, which
gives the appearance of being a natural experiment. More forgiving insolvency regulations
are felt to have the positive consequence of encouraging "better" and not just increased
entrepreneurship. Individuals who are considering starting up and working in a company
that has the explicit intention of growing or the potential to do so often take into account
the consequences of failure when they make their decision.
Therefore, the socio-economic benefit of considering less stringent insolvency regulations
is considerable, because the rules have an influence in particular on which individuals start
up companies. It is also worth mentioning that, from a growth perspective, the significance
PRODUCTIVE ENTREPRENEURSHIP AND INSOLVENCY LEGISLATURE
8
of the fact that entrepreneurs can continue actively doing business during a debt
rescheduling procedure is very slight. It is much more important for the overall time taken
by the bankruptcy and debt rescheduling procedures to be kept to a minimum and for the
individual to be given the opportunity to try again and to launch a new company or project.
The proposal from the Public Inquiry (Swedish Government Official Studies, SOU
2014:44) that the length of the payment plan should be three years, combined with the
proposal to change the effective procedural regulations, means that the overall time needed
for an insolvency procedure will in principle be halved. The proposal also allows certain
entrepreneurs who previously were not able to have their debts rescheduled to be offered
the opportunity to do so. For these people, the change has an even greater impact, because
under the terms of current legislation they cannot have their debts written off after
bankruptcy
Funding
Commissioned by: The Swedish Agency for Growth Policy Analysis
History
School
- Loughborough University London
Publisher
The Swedish Agency for Growth Policy AnalysisVersion
- VoR (Version of Record)
Publisher statement
Published with permission of the publisherPublication date
2015-02-18Language
- en
Depositor
Dr Kun Fu Deposit date: 27 April 2020Article number
Serial no. PM 2015:02, Reference number 2014/018Usage metrics
Categories
No categories selectedKeywords
Licence
Exports
RefWorks
BibTeX
Ref. manager
Endnote
DataCite
NLM
DC