Entrepreneurship and enforcement institutions: disaggregated evidence for Spain

Abstract

Entry of new firms, both in the form of entrepreneurs or corporations, fosters competition and productivity. Both the entry of firms and productivity have been low in the Spanish economy over the recent years. This paper analyzes the determinants of entry focusing on the role of the design and efficacy of enforcement institutions (the judicial system), a traditionally overlooked aspect. In order to do so, we examine disaggregated data at the local level in Spain. We find that higher judicial efficacy increases the entry rate of firms, while it has no effect on the exit rate. Crucially, that impact only occurs in the case of the entry rates of entrepreneurs, defined as self-employed, but not in the case of limited liability corporations. This finding may be explained by the fact that judicial (in)efficacy can be regarded as a fixed cost to be paid by agents that litigate. Hence, the economic activity of entrepreneurs -and specifically, their entry into the market- is expected to be more affected than that of larger firms.

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Notes

  1. 1.

    As a clarification, the term "limited liability corporation" is used in this paper as opposed to the term "unlimited liability firm". The first term includes all those companies that have limited liability. In this sense, the term includes companies that are called both "sociedades anónimas" and "sociedades de responsabilidad limitada" under Spanish law.

  2. 2.

    See also Baliamoune-Lutz and Garello (2014) for a complete literature review on the specific issue.

  3. 3.

    When we observe the average entry rate for the period 2004–2010 (using Eurostat Business Demography Statistics). This result complements the findings of López-García and Puente (2007) who show that the "turnover" of companies in Spain was lower than in other countries, especially due to the low rates of exit of firms.

  4. 4.

    Calculated as an indicator that equals one if individuals are starting a new business or are owners and managers of a young firm. The result is expressed as a % of respondents answering yes to the question.

  5. 5.

    Our analysis crucially hinges on the fact that limited liability companies are larger than the businesses run by self-employed individuals. See Sect. 3.1 for empirical evidence. Moreover, in Spain the creation of a limited liability company requires a minimum amount of initial capital (3,000 euros for a "sociedad limitada" and 60,000 euros in the case of a "sociedad anonima"). It should be noted that the sum of limited liability companies and companies with unlimited liability, such as those founded by entrepreneurs individually, account for nearly 100 % of companies in Spain. That is, there are some companies with a hybrid nature (“cooperativas” and “sociedades comanditarias”) but they are less than 1 % of the total number of firms and are not considered in this study.

  6. 6.

    The same argument can be found in the literature on the costs of "red tape" (OECD 2001 or Nijsen and Vellinga 2002).

  7. 7.

    There is also a military jurisdiction, which could be considered extraordinary.

  8. 8.

    The results of the Doing Business, although cannot be considered real efficiency measures, may be useful as a measure of entrepreneurs’ expectations about institutional reliability and their perception regarding the easiness in enforcing contracts (Ippoliti et al. 2014).

  9. 9.

    The new law completely replaced the old Civil Procedure Law of 1881. The new procedures and structures were very different from the old ones. This is why our analysis starts in 2001, at the time the new Law came into force. Mora-Sanguinetti (2010) provides a detailed analysis of the evolution from the old to the new Law.

  10. 10.

    Results for other procedures are available upon request. The conclusions are consistent with those shown in this paper.

  11. 11.

    The CGPJ is the governing body of the Spanish judiciary.

  12. 12.

    As an example: Decree-Law 8/2013 of Andalusia of May 28, de medidas de creacion de empleo y fomento del emprendimiento.

  13. 13.

    Ordenanza (AGES 2013) reguladora de la concesión de subvenciones a pequeñas y medianas empresas de San Sebastián de los Reyes para la generación de empleo neto.

  14. 14.

    The figure still shows a proportion of corporations with few employees. In fact, according to the business register of the Spanish National Statistics Institute, there were around 425,000 limited-liability companies with zero employees. Most of them, according to anecdotal and to Bank of Spain evidence, are not usual firms, but just legal entities that belong to families and whose only purpose is to handle a family’s wealth in order to benefit from improved taxation.

  15. 15.

    A new type of company, Sociedad Limitada Nueva Empresa, also has capital requirements, which range between 3,012 € and 120,202 €.

  16. 16.

    The recent reform of the tax code, which entered into force on 1 August 2014 (out of our sample period) establishes a reduced tax rate of 20 % for SMEs that meet some financial criteria.

  17. 17.

    Moreover, there were some outliers. Specifically, the entry rates (both for corporations and self-employed) in the province of Caceres in 2001 were extremely high. Those observations have been replaced by their province-means for the rest of years (2002–2009).

  18. 18.

    In several experiments we have used the province’s population (in logs) instead. The same results were found, as the correlation between the two variables is 0.97.

  19. 19.

    See López-García and Puente (2006) for evidence on Spain.

  20. 20.

    The raw data has been cleaned using several filters. We have eliminated: (i) state-owned companies, as they resolve their conflicts in different courts than those analyzed in this study; (ii) foreign companies, as they may resolve their conflicts in other countries; (iii) consolidated accounts, as they may include subsidiaries whose registered offices are not in the same province as that of the parent company, consequently using courts of different provinces; (iv) non-profit organizations and membership organizations; (v) data inconsistencies.

  21. 21.

    It would also seem appropriate to control for population density, since regions with high population density, such as those with large metropolitan areas, normally attract more human capital. While it has been used in a number of experiments -without changes in the results- it has finally been dropped because of the high correlation (0.81) with GDP.

  22. 22.

    Nevertheless, log-log and linear-log specifications have also been fit, yielding similar results but a lower R-squared.

  23. 23.

    The current bankruptcy law (Ley Concursal), which entered into force in September 2004, established the creation of new courts (mercantile courts) which are specialized in bankruptcy procedures. Prior to that law, bankruptcy procedures were solved in the general civil courts.

  24. 24.

    Although entry regulations (see Djankov et al. 2002; Klapper et al. 2006 for a discussion on this specific issue) and, in general, institutions, change slowly over time (and thus the province-fixed effects may capture them quite accurately in a short time period like the one used in our sample, 2001–2009), we checked, as a robustness exercise, if introducing an effective measure of entry regulations affected our results. In the presence of the other variables and fixed effects, the regulation variable [taken from Matea and Mora-Sanguinetti (2012)] has no significance or does not affect the results of our variable of interest. We do not show the results in this version of the paper while the variable only has regional variation (and hence the estimates lose a large number of observations). The results are available upon request or in the WP version. The same can be said when including a variable capturing regional taxation (tax pressure).

  25. 25.

    Correlations among the regressors, shown in the Appendix, suggest that there are no multicollinearity problems except in the case of Lawyers, so we only include this variable in some specifications.

  26. 26.

    The results displaying the estimates of those controls are available upon request.

  27. 27.

    The province with the best law enforcement (i.e., lowest Congestion Ratio) is Alava, with an average value of 1.65 for 2001–2009, while the province with the worst law enforcement (i.e., highest Congestion Ratio) is Alicante, with an average value of 2.80. Hence the simulated change amounts to 1.65 − 2.80 = −1.15.

  28. 28.

    By relative increase we mean 100 * [X(1) − X(0)]/X(0), where X(0) and X(1) are the initial and final values, respectively.

  29. 29.

    In analogous fashion, Klapper et al. (2004) find that another type of entry barrier, regulation, has no adverse effect on entry in corrupt countries, but only in less corrupt ones. A general discussion on these dynamics could be found in North (1990).

  30. 30.

    See, for instance, Ponticelli (2013) and the above mentioned experiments of Lichand and Soares (2014) and Chemin (2009).

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Acknowledgments

We are grateful to participants in the Swedish Entrepreneurship Forum (Stockholm), the XXXVIII Simposio of the Spanish Economic Association (Santander), the Economic Analysis of Litigation Workshop (Catania), the research seminar of the Banco de España and the CFCM seminar at the University of Nottingham. We wish to thank Pontus Braunerhjelm, Johan Eklund, Javier J. Perez, Giovanni B. Ramello, Margarita Rubio, José Carrasco, Claire McHugh, Rocío Prieto and to two anonymous referees for their useful comments and suggestions. We thank as well Ildefonso Villan Criado (CGPJ) for his advice in the use of the judicial performance data and Marcos Marchetti for excellent research assistance. The views expressed are those of the authors and should not be attributed to the Banco de España or the Eurosystem.

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Correspondence to Juan S. Mora-Sanguinetti.

Appendix

Appendix

See Table 6.

Table 6 Regressors’ correlation matrix

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García-Posada, M., Mora-Sanguinetti, J.S. Entrepreneurship and enforcement institutions: disaggregated evidence for Spain. Eur J Law Econ 40, 49–74 (2015). https://doi.org/10.1007/s10657-014-9470-z

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Keywords

  • Entrepreneurship
  • Judicial efficacy
  • Barriers to entry

JEL Classification

  • L26
  • M13
  • K40
  • R12