Government ownership of banks, political system transparency, and regulatory barriers to new firm entry
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Government ownership of banks, political system transparency, and regulatory barriers to new firm entry Jana Grittersová1 · Matthew C. Mahutga2
© Springer Nature Limited 2019
Abstract Why do governments pursue regulatory reforms fostering entrepreneurship? In this paper, we examine the link between government ownership of banks, political regime transparency, and regulatory barriers to the entry of new industrial firms. We propose a signalling theory for the deregulation of entry. We argue that high levels of government ownership of banks and political system opacity erode the reputation of national economies in the eyes of international investors. To improve international perceptions of their business and investment climate, governments reduce regulatory barriers to new business entry. Deregulation of new firm entry signals an improved investment climate to foreign investors, and thereby substitutes for political system transparency. This signal is credible, valued by international investors, and easier to implement than alternative signals. Evidence drawn from an analysis of 93 developed and developing countries supports our propositions. Countries with high levels of state ownership of banks exhibit higher regulatory barriers to firm entry. However, this relationship attenuates and even reverses in extremely opaque political systems. Consistent with our argument that international perceptions are the key mechanisms underlying this conditional relationship, we also show that the moderating effect of political system opacity weakens among countries with high levels of government ownership of banks and FDI inflows. Our findings have important implications for the literature on state ownership of banks, the political economy of reform, and for our understanding of strategic signalling in international relations. Keywords FDI (foreign direct investment) · Global economy · Regulation · Signalling · State-owned banks · Political system transparency
* Jana Grittersová [email protected] Extended author information available on the last page of the article Vol.:(0123456789)
J. Grittersová, M. C. Mahutga
Introduction In his 2014 State of Union address, President Obama called for more government support to entrepreneurs and small business owners, who create the majority of jobs in the United States. Legal barriers to the establishment of new businesses are important determinants of economic opportunity for small entrepreneurs. This paper focuses on the political feasibility of one of the most important economic reforms aimed at reducing costs of entry to new businesses, which involves lowering entry barriers. What factors influence governmental decisions with regard to regulation of entry for new firms? And how can we explain that countries so diverse as Russia, the United States, Bahrain, Australia, Slovenia, China, and Denmark are among those that have the lowest cost barriers to the entry of new industrial firms? We assess the relationship between bank ownership, political regime transparency, and regulat
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