Should a one-time entry cost matter?

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As I mentioned in my previous post, some critics have argued that too much attention is paid to the costs of starting a business. One way of stating the critique is that a cost that has to be paid only once ought not to have a big effect on a firm’s decisions. Arvind Panagariya of Columbia University makes this argument in his opinion piece for the Economic Times. He states:

…even within the narrow confines of regulatory regime, some policy dimensions emphasised by the index are of questionable value. For instance, the index attaches great importance to the costs incurred and time taken in starting a business. But when firms are entering a market with a horizon of several decades, does it matter whether it costs $500 rather than $5,000 and takes 20 rather than 200 days to start the business?

My question is whether or not the time horizon for a potential start-up firm is really one of several decades. Eric Bartelsman, John Haltiwanger and Stefano Scarpetta study firm survival rates (and a lot more) in this article. Figure 4 gives the probability that a new firm survives two, four, and seven years for several countries.

Survival rates

On one end of the spectrum is Mexico, where a new manufacturing firm only has about a 30% chance of surviving seven years. At the other end of the spectrum is Slovenia, where a new manufacturing firm has about a 70% chance of surviving seven years.

Given the observed time horizons for new firms, at least in some countries, the monetary and time costs of initial registration may be quite important.

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