Insight: Regulation ‘can be good for small firms’

Is red tape actually good for you? (Image: Marilyn Nieves)

Do you want to pay more taxes?

Thought not. Whilst in principle many of us support the idea of higher taxation to pay for better equipment for soldiers and better hospitals, when it applies to you in particular there is often more reluctance. The same logic applies to regulations and small businesses.

Ask an entrepreneur from any sector what they think about regulations and invariably the word “burden” comes as part of their initial response. In many respects regulations are indeed a burden. The administrative costs for complying with new and revised regulations do logically exact a greater proportion of resource from the smaller firm. Most research into this topic asks entrepreneurs their opinions about regulation through questionnaire surveys. Unsurprisingly most responses are negative.

But as with taxation a lot of hot air gets expended talking about regulation. Some people imagine a utopian world of free-markets where there are absolutely no regulations fettering business. The aim of de-regulation for them is a world empty of constraints. This is clearly never going to be achieved, nor would most reasonable people want it. “Red tape” for the entrepreneur means good working conditions for their employees and a guarantee of safe, quality products for consumers. It also means a sustainable and predictable business environment.

Logically, the regulatory environment must always be in a state of flux. Our economy and society changes, and laws reflect this dynamism. Regulations are never totally fit for purpose, not least because they have to satisfy diverse interests. Governments have a hard job: on the one hand trying to win votes by saying they will reduce complexity and the amount of regulation, whilst at the same time ensuring that business activity is governed in an efficient, effective and sensible manner. Despite the rhetoric of being the small firms’ friend, governments often struggle to actually reduce, let alone simplify administrative “burden”.

Government also has a responsibility to look at the big picture: to go beyond politics and do the right thing. Many regulatory initiatives are meant to have a universal effect, because it is good for the nation as a whole. Ultimately the government has a responsibility to protect citizens, consumers and employees, and, where appropriate, to steer industrial policy. Sometimes this means that small firms lose out. Sometimes this is a good thing, even for the small firm. Regulations can have a profoundly positive impact on the international competitiveness of industries. High compliance costs can shift industries and their small firms into high-end, high-quality markets. Getting it right is difficult, as is knowing whether you have got it right, because someone is always going to be unhappy.

However, detailed long-term research into the behaviour of small firms shows a much more nuanced and less alarmist picture of how regulation is actually experienced. The project I managed between 2009 and 2012 examining the bio-pharma, film and interactive media, environmental services and security sectors showed that professional, growth-oriented small firms don’t view regulation as a major issue. The objective of the project, funded by the Economic and Social Research Council, was to understand the everyday reality of living with regulation.

Despite the constant far-fetched news report about Health and Safety Executive or Environment Agency regulatory excess, the research showed that employees and entrepreneurs actually got on with the business of regulatory compliance in an efficient manner. Regulation in the most part was treated like the office furniture: routine and unproblematic. Indeed, regulation was often used to create new market opportunities. For some firms, sector-specific regulations actually underpinned their business model. Others used employment and other regulations to help shape and restructure the firm, providing a basis from which to embed formal professional business practices.

There are some areas that did cause continual headaches. Employment regulations around dismissal and redundancy created more confrontational situations than were really necessary. The law in these areas seemed to reconfigure what had been relatively harmonious and open employer-employee relations into legalistic and emotionally wrought battlegrounds.

Rather than there being too little regulation, the firms in this study would often suffer as a result of the lack of government enforcement. For example, regulation aimed at raising standards in the security industry and removing ‘cowboy operators’ was simply not being enforced. As a result, better quality and more compliant firms faced rising costs but gained no competitive advantage. Clarity and stability were also important. Uncertainty about how regulations were to change and when, caused many a headache.

The government should help to create clearer and better regulatory regimes in order to stimulate business growth. The political rhetoric of burden isn’t useful and nor does it reflect the everyday experience of small growth-oriented firms. In reality, most businesses, their managers and their employees, see the need for and benefits of regulation.