Entry Barriers and Firm Dynamics: Evidence from the Minimum Capital Requirement in Finland

Loading...
Thumbnail Image
Journal Title
Journal ISSN
Volume Title
School of Business | Master's thesis
Date
2020
Major/Subject
Mcode
Degree programme
Economics
Language
en
Pages
63 + 18
Series
Abstract
In this thesis, I evaluate the effects of the minimum capital requirement on firm dynamics in Finland. Specifically, I look at the number, survival and employment growth of entrant firms. I also explore the dynamics of incumbent firms and overall employment. I find evidence that lowering the minimum capital requirement causes an increase in the number of limited companies created and a net increase in the number of jobs created by young limited companies. The effect is potentially very large, though significant uncertainty remains over the magnitude. As for the effects on incumbents and total employment, the evidence is inconclusive. The minimum capital requirement is a regulation that obliges the founder(s) of a limited company to invest at least a certain amount towards the share capital of their firm. As such, it serves as a potential barrier for new entrepreneurs, especially considering the fact that most limited companies are founded using the minimum required amount of capital. Recent research has noted a declining trend in entry rates and the economic contribution of young firms across the developed world, and this thesis also provides descriptive evidence that suggests Finland is experiencing similar trends. Policy makers may look to the lowering of entry barriers as a response to such trends. Perhaps as an example of this, the minimum capital requirement has indeed been recently removed entirely in Finland, with an explicit goal of easing the setting up of businesses. With this in mind, I look at the effects of two previous reforms in the minimum capital requirement. Between its introduction in 1980 and removal in 2019, the minimum capital requirement went through two major alterations: first an increase from 15 000 Finnish markkas to 50 000 Finnish markkas in 1997 and then a decrease from 8 000 euros to 2 500 euros in 2006 (after a conversion from 50 000 mk to 8 000 €). Comparing industries that I expect to have been more affected by the reforms to those industries for which I expect the effects to be relatively small, I estimate that the latter reform led to the creation of roughly a thousand new limited companies per year in 2007-2017 with little drop in average performance, but find no evidence for any effects of the former reform. There might be several reasons for the conflicting results, for instance data limitations in case of the 1997 reform and potential confounding factors inflating the estimates of the 2006 reform. However, some of the descriptive evidence shows patterns that are strongly suggestive of the existence of an effect in both cases. Overall, the evidence suggests that lowering entry barriers, at least the minimum capital requirement, is a potential tool for increasing employment, though there might be other negative effects - for instance on productivity or the protection of consumers and debtors - that are not explored here. Furthermore, it alone is unlikely to turn around the trend of falling entry rates and economic contribution of entrants.
Description
Thesis advisor
Terviö, Marko
Keywords
firm dynamics, entry barriers, minimum capital requirement, entrepreneurship
Other note
Citation