Chapter 2. Institutional and regulatory framework

Effective product and labour market regulations, taxation, competition, insolvency regimes, contract enforcement, civil justice systems and public governance are key to ensure that businesses of all sizes compete on a level playing field, encourage risk-taking by entrepreneurs and incentivise business investment. Regulatory inefficiencies, complexities and high compliance costs are particularly detrimental to new firms and SMEs, which are affected disproportionately by regulatory burdens or face greater constraints than large firms in seeking legal redress. This chapter presents recent developments in institutional and regulatory frameworks, discussing implications for SMEs and entrepreneurship. It illustrates cross-country progress in reducing regulatory barriers on entrepreneurship and administrative burdens on start-ups and SMEs, such as through smart regulation, reforms in taxation and the strengthening of e-government functions, hinging on a comprehensive infrastructure for information exchange across government bodies, individuals and businesses. It also highlights that the pace of structural reforms has slowed down in recent years, and comments on areas in which progress is slow or uneven across countries, including the ex-post evaluation of norms and policies, insolvency regimes, enforcement of competition laws and civil justice systems. The chapter concludes on recent policy initiatives aiming to implement a user-centric approach to regulation and policy making, enhancing transparency and efficiency in public services and legal frameworks, and leveraging digital technologies and Big Data for better public administration and regulation.

    

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Highlights
  • Improving the quality and outcomes of regulatory processes, simplifying administrative procedures and cutting red tape are at the core of pro-growth reforms in many countries. Governments have been promoting smart regulation by integrating SME-related considerations upstream in regulatory policy making, encouraging broader stakeholders’ consultation and reinforcing regulatory impact analysis. However, ex-post evaluation systems remain underdeveloped.

  • The digitalisation of public services offers new opportunities for SMEs to access higher quality and more customised services and interact with public administration in more collaborative and efficient ways. Applications are already spreading across a broad range of areas, including business development services, license systems and courts.

  • Greater data availability also enables governments to better adapt public sector operations to end users’ needs and preferences. Behavioural insights are being applied to better integrate a user perspective in policy delivery. Data analytics is also transforming the relationship between tax administrations and tax payers and improving tax compliance conditions. Reforms hinge on a comprehensive infrastructure for information exchange across government bodies, individuals and businesses.

  • Governments are increasingly institutionalising the open government principles of transparency, accountability and participation. Efforts are placed on strengthening public sector integrity and facilitating collaborative approaches with businesses and citizens, also as a response to a declined confidence in national governments.

  • However, the pace of structural reforms has slowed in recent years, particularly in terms of strengthening insolvency regimes and offering entrepreneurs a second chance. There is persistent and significant cross-country variability in the enforcement of competition laws and progress in civil justice systems is uneven.

Why is it important

Institutional and regulatory settings are critical for entrepreneurial activity and to ensure that businesses of all sizes compete on a level playing field. Regulation in product and labour markets, taxation, competition, insolvency regimes, legal framework and court efficiency and public governance impact entrepreneurship and SME development at all stages of the business cycle, including entry, investment and expansion, transfer and exit.

An effective regulatory environment, which provides clear and universal rules of the game, is essential for promoting risk-taking, incentivising business investment, lowering informality and reducing corruption. Conditions for regulatory compliance are especially important for start-ups and SMEs, since the proportion of resources that they divert to administrative functions is usually greater than for large firms; as a consequence, unnecessary regulatory burdens affect them disproportionately (OECD, 2017[1]).

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This is the case also for tax compliance due to the substantial fixed costs incurred for record keeping, filing and payment processing that place smaller businesses at a disadvantage. High compliance costs and complex tax regimes may act as a deterrent to formalisation and hamper young firms’ growth. Furthermore, certain aspects of business taxation, including asymmetric treatment of profits and losses, the distribution of taxation between capital and labour income and the design of R&D tax credits and incentives, can unintentionally disadvantage young and small firms (OECD, 2015[2]).

Competitive conditions, including transparency and consistency of competition rulings and competitive neutrality between state-owned enterprises (SOEs) and private businesses, are essential to an efficient use of economic resources (OECD, 2012[3]), (OECD, 2017[4]). Regulatory restrictions that limit market entry and anti-competitive practices, such as market power abuse by incumbents and predatory pricing behaviour, can undermine business dynamism and discourage innovation. Their effects tend to fall disproportionately on SMEs, which typically face greater constraints than large firms in seeking legal redress when a competitor breaches antitrust or trade practices law.

Effective contract enforcement and civil justice system are key to business entry and growth, since they tend to improve the predictability of business relationships and investment returns. On the other hand, court inefficiency increases the internal resources that firms may need to divert for enforcing contracts and resolving commercial disputes, undermines confidence in the integrity of markets and may discourage firms to engage in new business partnerships, which is particularly prejudicial to new entrants (Johnson, McMillan and Woodruff, 2001[5]).

Securing property rights plays a critical role for business development. In particular, land and buildings represent essential collateral for many SMEs to access credit. Accessing appropriate and affordable lands, premises and offices are essential conditions for setting a business, accessing markets and scaling-up activities. Trends in land and housing prices and use, which are affected by a wide array of public policies, have important implications for business investment. Land-use planning can ease the coordination of public and private investments, foster agglomeration economies and facilitate synergy between different activities and land use functions, as in the case of industrial symbiosis and the circular economy. Furthermore, land-use regulation can affect competition, such as in the case of adverse impact tests that allow new businesses to enter markets only if established businesses are not harmed (OECD, 2017[6]).

Insolvency regimes are critical for business dynamism. Bankruptcy laws that ensure a balance between the guarantees given to investors and the burden placed on entrepreneurs in case of failure can favour investment and growth. On the other hand, inefficient insolvency regimes limit SME access to external finance and the restructuring of viable firms. Lengthy and complicated insolvency processes can significantly affect the capital and reputation of small entrepreneurs, drastically decreasing the chance of starting a business again. Cross-country evidence suggests that lower personal costs to failed entrepreneurs can increase self-employment rates, firm entry rates and the use by small entrepreneurs of insolvency proceedings, as well as attract entrepreneurs with higher human capital (OECD, 2018[7]).

As businesses interact in multiple ways with the public administration, public service integrity, efficiency and quality are important drivers of firm competitiveness. Opacity and corruption in the public sector, while detrimental to all businesses, pose particular problems for SMEs, which often lack the capacity to design and implement anti-corruption strategies and lobby for their needs in the absence of an established framework for broad participation in public decision making. Inefficiency in public services and high administrative burdens can also affect integrity. Evidence shows that when faced with excessive administrative burdens, SMEs are more likely than large firms to make illegal payments in order to circumvent the burden. Also, arbitrary decision making and corruption in public administration discourage formalisation of business activities and can induce formal companies to “de-formalise” their operations (G20/OECD, 2015[8]); (UNIDO, 2007[9]).

Regulation, institutions and recent trends

Regulatory barriers to entrepreneurship and SME development have been declining

Over the last two decades, in many countries, important progress has been made to reduce regulatory barriers to entrepreneurship, such as legal barriers to entry, administrative burdens on start-ups, regulation complexity and regulatory compliance costs in different areas (e.g. environment, labour legislation, product standards and certification) (OECD, 2017[1]).

Regulatory impact analysis (RIA) has become a widespread practice to improve the quality and outcomes of regulatory processes. In a large number of countries, the evaluation of costs and benefits of regulation for achieving policy goals, which often considers also the costs and benefits of non-regulatory alternatives, is being institutionalised. In almost all OECD countries, RIA has become a requirement for the development of both primary laws and subordinate regulations. At the same time, the scope of requirements has changed over time, to take into account also the burdens and complexities that RIA processes can bring. In fact, in line with a proportionate approach to impact assessment, the number of OECD countries requiring RIA on all regulations has decreased from 30 in 2014 to 19 in 2017. In addition, about one third of OECD countries use threshold tests for determining whether a simplified RIA is undertaken, as opposed to a full one (OECD, 2018[10]).

Regulatory impact on small businesses is assessed in a large majority of countries and for a wide range of regulations (Figure 2.1). Also, increasingly across countries, the RIA process provides broad public consultation opportunities, as well as safeguards to ensure that adequate account is taken of comments received from stakeholders, including extensive periods of consultation on the draft RIA (OECD, 2015[11]), (OECD, 2018[10]).

Figure 2.1. Small business impacts are among the most systematically assessed through RIA
Types of impacts assessed in RIA, 2014 and 2017
Figure 2.1. Small business impacts are among the most systematically assessed through RIA

Note: Data for OECD countries is based on the 34 countries that were OECD members in 2014 and the European Union. Data on new OECD member and accession countries in 2017 includes Colombia, Costa Rica, Latvia and Lithuania.

Sources: OECD (2018[10])OECD Regulatory Policy Outlook 2018https://dx.doi.org/10.1787/9789264303072-en, based on OECD (2014[12]) and OECD (2017[13]), Indicators of Regulatory Policy and Governance Surveys 2014 and 2017, http://oe.cd/ireg.

 StatLink http://dx.doi.org/10.1787/888933924286

But the quality of regulatory impact assessment is uneven, and ex-post evaluation remains largely underdeveloped

Despite significant progress in adoption, challenges remain for ensuring even quality in RIA processes and outcomes and for increasing its effectiveness on small business regulations. Barriers include the lack of SME-related data and shared methodologies within administrations, as well as limited resources and analytical capability in regulatory bodies. RIA is in fact a time consuming and resources intensive process, which calls for prioritisation. A general tendency is observed to adopt a procedural approach and use RIA as a legitimisation tool rather than as an information instrument and a learning process in support of decision making (OECD, 2017[14]).

Enhancing the application of RIA in the policy process requires significant investment to trigger a change in the administration and strengthen the economic analysis of regulatory proposals in contexts often dominated by legal experts. It also demands political commitment, support from stakeholders, and consistency across levels of governments (OECD, 2015[11]).

Box 2.1. Regulatory framework across levels of government

Mechanisms to coordinate regulatory policies across levels of government can help achieve coherence in the regulatory framework, ensuring that regulations are not divergent, overlapping, or contradictory. Such coordination mechanisms may include intergovernmental platforms for dialogue, mutual recognition policies among governments, regulatory harmonisation agreements, and strict regulatory uniformity agreements.

In the majority of OECD countries, formal coordination mechanisms between levels of government exist, or the national government is required to consult sub-national governments prior to issuance of regulations that concern them. National agencies may also provide technical support to local administrations to improve quality of regulations. For instance, in Mexico, the Federal Commission on Regulatory Improvement (COFEMER), an administrative body within the Mexican Federal Ministry of Economy, provides feedback on existing regulations and offers technical advice on regulatory reform to states and municipalities. This consists in promoting local regulatory reform, adjusting local regulations and establishing “Rapid Business Start-up Systems” and “Regulatory Improvement Councils”. Local level implementation is thus a core part of the organisation’s activities.

Source: OECD (2018[15])Rethinking Regional Development Policy-makinghttps://dx.doi.org/10.1787/9789264293014-en.

Digital technologies hold the potential to strengthen consultation processes, including with small businesses, and widen the collection of evidence about costs and benefits of regulations. Also, in some OECD countries, the creation of an oversight unit for RIA, close to the centre of government, has served to signal commitment, favour increased co-ordination between the various phases of the policy cycle and whole-of-government approaches.

RIA can serve ex post evaluations of regulations by establishing criteria against which a regulation will be assessed after implementation. However, linking RIA to ex post evaluation is still not an established practice. Only about 40% of OECD countries identify a process for assessing progress in achieving a regulation’s policy goals when developing new primary laws (OECD, 2017[14]).

More broadly, most OECD countries lack a comprehensive methodology for systematic ex post evaluation, which is still not mandatory in one-third of OECD countries. Some marginal progress was observed over 2014-17 in oversight and quality control to ensure effective implementation, but ex-post evaluation systems are still rudimentary in most OECD countries (OECD, 2018[10]).

Restrictions to competition have been lifted across jurisdictions, but globalisation and digitalisation pose new challenges

Since the late 1990s, reforms in competition regimes have increasingly aimed to lowering legal barriers to entry and limiting antitrust exemptions. At the same time, significant cross-country variability remains in the enforcement of competition laws. This is the case of advocacy activities, such as the publication of guidelines by competition agencies, which can help SMEs in particular to navigate the competition framework (Alemani et al., 2013[16]).

Figure 2.2. Ex-post evaluation systems remain underdeveloped
Systematic adoption of a methodology for ex post evaluations, 2014 and 2017
Figure 2.2. Ex-post evaluation systems remain underdeveloped

Note: Data for OECD countries is based on the 34 countries that were OECD members in 2014 and the European Union. Data on new OECD member and accession countries in 2017 includes Colombia, Costa Rica, Latvia and Lithuania.

Sources: OECD (2018[10])OECD Regulatory Policy Outlook 2018https://dx.doi.org/10.1787/9789264303072-en, based on OECD (2014[12]) and OECD (2017[13]), Indicators of Regulatory Policy and Governance Surveys 2014 and 2017, http://oe.cd/ireg.

 StatLink http://dx.doi.org/10.1787/888933924305

The increased globalisation of economic activity raises challenges for competition authorities, as they must respond to anti-competitive conduct and mergers whose effects are increasingly cross-border, often requiring support from foreign enforcers. For instance, over 1990-2014, mergers and acquisitions with a cross-border dimension have increased by more than 250%, and most of these transactions are subject to competition law review by multiple competition authorities (OECD, 2014[17]). The multiplicity of competition regimes and authorities creates additional complexity for businesses that operate across borders or face anti-competitive practices by multinational players. As a consequence, multilateral coordination and cooperation has become increasingly important to ensure an open and level playing field in global markets.

The rapid digital transformation of economies and societies further increases the need for international cooperation on regulatory aspects, while raising questions about the suitability of traditional regulatory frameworks. Concerns exist about “winner take all” dynamics unleashed by digital technologies and the market power that some digital firms have developed, as well as the scope for using certain digital technologies to support anti-competitive practices (see also the chapter on market conditions). For instance, the increasing use of pricing algorithms can potentially enhance competition but also, on occasion, increase the risks of collusion. At the same time, established frameworks, as well as the lobbying activity by traditional business models at risk of displacement by innovation, can prevent or slow down the development of new digital products and services, and the market entry of new players (OECD, 2018[18]).

As the fast pace of technological change and globalisation increases complexity and uncertainty in terms of what and how to regulate, governments are experimenting a variety of approaches to sustain innovation and address emerging risks in an impartial and proportional fashion (OECD, 2018[10]). In particular, “regulatory sandboxes”, which provide a limited regulatory waiver and flexibility, are gaining popularity as a model to enable business experimentation and testing, but also as a way for regulatory and competition authorities to improve understanding on the changing nature of business models and activities.

In many countries, tax reforms have been enacted in many countries to spur growth

With the aim to improve the investment climate, a large number of OECD governments have reduced corporate taxes on businesses in recent years. The OECD average Corporate Income Tax (CIT) rate declined from 32.2% in 2000 to 23.7% in 2018 (Figure 2.3). In 2017, eight countries, including Hungary, Israel, Italy, Japan, Luxembourg, Norway, the Slovak Republic and the United Kingdom, introduced standard CIT rate cuts averaging 2.7 percentage points. In 2018, eight countries, namely Argentina, Belgium, France, Japan, Luxembourg, Norway, Sweden and the United States, overhauled their tax system by cutting their statutory CIT rates, with an average decrease of around 4.8 percentage points (OECD, 2018[19]). As a result, pressures on national governments to keep up with intensified worldwide tax competition have increased. There is also evidence of increased cross-country competition to attract investments through new or enhanced tax incentives for R&D and intellectual property related activities (OECD, 2016[20]).

Figure 2.3. Taxation increasingly aims to stimulate an investment climate for business
Combined statutory corporate income tax rate (CIT), OECD average, percentage, 2000-18
Figure 2.3. Taxation increasingly aims to stimulate an investment climate for business

Note: Basic combined central and sub-central (statutory) corporate income tax rate given by the central government rate (less deductions for sub-national taxes) plus the sub-central rate

Source: OECD (2018[21])OECD Tax Database - Corporate and Capital Income Taxeshttp://www.oecd.org/tax/tax-policy/tax-database.htm.

 StatLink http://dx.doi.org/10.1787/888933924324

The trend towards reduced CIT rates concerns also SME specific regimes. Over 2000-18, across nine OECD countries that applied a special small business corporate tax rate (i.e. Belgium, Canada, France, Japan, Korea, Luxembourg, the Netherlands, Spain and the United States), the average rate decreased from 25.6% to 19.4%. Governments extended support to SMEs through other special tax rules, including tax deductions, credits or exemptions; and preferences that apply to the business owner or the investor of the SME, providing relief for initial investment, ongoing income or disposal of the SMEs’ assets.

Furthermore, simplification measures for SMEs are widespread across OECD and non-OECD economies, including exemption on thresholds, special presumptive tax regimes and special replacement taxes (OECD, 2015[2]). Significant efforts have been placed on reducing tax compliance costs, through the introduction of electronic filing and payment systems. Advances in technology and greater data availability are enabling tax administrations to move from a system based on filing and post-assessment to a system that embeds compliance in commercial transactions and includes upfront verification, substantially reducing the administrative burden for taxpayers. Comprehensive electronic infrastructure for information exchange between the tax administration, public sector agencies, individuals and businesses has served as a fundamental enabler (OECD, 2017[22]).

If on the one hand the weight of CIT in the OECD average tax mix has declined, on the other tax wedges, i.e. the spread between total labour costs to the employer and the net income for employees, have increased in the post-crisis period (OECD, 2017[23]). High tax wedges negatively affect employment creation and competitiveness (Alesina and Perotti, 1994[24]); (Bassanini and Duval, 2006[25]), and slow down the rate at which SMEs are able to grow.

Social security systems impact entrepreneurship and self-employment through direct benefits and costs, including taxation, as well as opportunity costs incurred by individuals that set up a business. These include, for instance, benefits that are lost when entering into self-employment, since the self-employed are not eligible for the same social protection than employees (Davies, 2013[26]). To address these biases, reforms are being introduced that strengthen social insurance for self-employed from disadvantaged groups or individuals in the lower tiers of the income distribution (e.g. unemployed people, youth, women, migrants, indigenous groups), since these are more likely to receive welfare support and thus incur in higher opportunity costs when entering self-employment (OECD/EU, 2017[27]).

But the pace of structural reforms has slowed in recent years

While pro-growth structural reforms accelerated in the aftermath of the 2008-09 global financial crisis, their pace has slowed significantly since 2015-16, in advanced and emerging-market economies alike (OECD, 2018[7]). In particular, reforms to improve the efficiency of insolvency regimes have been slow in many countries (Figure 2.4). Efforts have focused mainly on prevention and streamlining (e.g. through pre-insolvency regimes), although early-warning systems and special insolvency procedures for SMEs are only available in about one-third of OECD countries. Over 2010-16, barriers to firm restructuring remained stable or declined only marginally in most countries. Substantial reforms were observed in Chile, Germany, Greece, Japan, Portugal and Slovenia, although reform efforts had a different focus across countries. For instance, Portugal exhibited the largest improvements in prevention and streamlining, while Chile and Greece are, together with Spain, the only countries that have introduced significant reforms affecting personal costs to failed entrepreneurs. In fact, the time to discharge – and thus the personal costs associated with entrepreneurial failure – remains high in many OECD countries (Adalet-Mcgowan and Andrews, 2018[28]).

Figure 2.4. Insolvency regimes have improved unevenly across countries, if at all
Composite index of insolvency regimes, from 0 (least stringent) to 1 (most stringent), 2016
Figure 2.4. Insolvency regimes have improved unevenly across countries, if at all

Note: The stacked bars correspond to three subcomponents of the insolvency indicator in 2016. The diamond corresponds to the value of the aggregate insolvency indicator based on these three subcomponents in 2010.

Source: Adalet-Mcgowan, M. and D. Andrews (2018[28]), “Design of insolvency regimes across countries”, https://doi.org/10.1787/d44dc56f-en (accessed on 12 March 2019).

 StatLink http://dx.doi.org/10.1787/888933924343

Strategies to enhance civil justice systems have been widely adopted but progress remains uneven

Improving the efficiency of court and legal frameworks represents another important priority of pro-growth reforms. Many governments have aimed to reduce the length of civil justice proceedings through simplification of procedures, increased digitalisation of courts and the promotion of alternative dispute mechanisms. However, lengthy trials remain a challenge to business activity in a number of OECD countries. In Europe, in 2016, the estimated length to resolve litigious civil and commercial cases at first instance varied from about 100 days in Lithuania and Luxembourg to more than 500 in Italy. Differences were even larger when considering all courts instances, ranging from less than 200 days in Estonia to more than 1,400 days in Italy (European Commission, 2018[29]).

E-government services are being strengthened to improve public governance and deliver better services

Digital instruments, such as government portals, are increasingly used to improve transparency in public measures, provide information and access to public services, and ease the interaction of citizens and businesses with the government and public administration (OECD, 2017[1]). According to a 2017 survey of governments in OECD countries, strengthening e-government services, such as online handling of governmental administrative requirements, is the highest ranked policy objective for national digital strategies, representing also a lever to promote greater ICT usage among individuals and businesses (OECD, 2017[30]).

Furthermore, countries are increasingly institutionalising the open government principles of transparency, accountability and participation. About half of OECD countries have adopted a national strategy on open government data. Most countries set up formal requirements for disclosing a large quantity of datasets in open, unrestrictive and re-usable formats, but fewer actively encourage the re-use of data both by the public sector (e.g. via information sessions and regular trainings to civil servants) and by external stakeholders (e.g. through data awareness initiatives) (Figure 2.5). Also, only a few countries formally evaluate whether open government initiatives achieve the desired impacts (OECD, 2017[14]).

Figure 2.5. Countries are making uneven progress at opening government data
Open-Useful-Reusable Government Data index (OURdata), scale from 0 (lowest) to 1 (highest), 2016
Figure 2.5. Countries are making uneven progress at opening government data

Note: The OECD OURdata Index assesses governments’ efforts to implement open data in three critical areas: i) “data availability” considers the open by default policy, stakeholder engagement for the prioritisation of data release, and the availability of strategic open government data (OGD) on national portals; ii) “data accessibility” refers to the availability of formal requirements, and the implementation of these, in regard to the publication of OGD with an open licence, in open formats (e.g. non-proprietary) and accompanied with the descriptive metadata, as well as on stakeholder engagement for data quality; iii) “government support to re-use” includes data promotion initiatives and partnerships, data literacy programmes and monitoring and evaluation. For more details on the methodology, see (Ubaldi, 2013[31]).

Sources: OECD (2017[14]), Government at a Glance 2017, https://dx.doi.org/10.1787/gov_glance-2017-en, based on OECD (2016[32]), 2016 OECD survey on Open Government Data, OECD, Paris.

 StatLink http://dx.doi.org/10.1787/888933924362

Recent policy developments

Implementing a user-centric approach to regulation and policy making

Regulatory authorities and government agencies are increasingly adopting approaches that aim to improve their capacity to identify and respond to diverse and evolving users’ needs, such as by facilitating users’ feedback and iterative improvement.

“Smart regulation” aims to ensure that regulatory settings are responsive to the diversity of actors and instances that are regulated, strengthening the evidence base to regulation and assessment tools, reducing burdens as to deliver the desired result in the most efficient and effective way, enhancing transparency, and engaging stakeholders throughout the policy cycle. To this aim, governments have been promoting the integration of SME-related considerations upstream in the policy making and along the whole policy cycle, from rationale to design, implementation, monitoring and ex post evaluation (Table 2.1).

  • In particular, public consultation has become a pillar of “smart regulation” in many countries.

  • As part of their smart regulation strategies, governments also increasingly consider flexible regulatory options that can reduce costs for small businesses.

  • Another approach for reducing regulatory complexity is the adoption of ‘stock-flow linkage’ rules, such as the One-for-One rule (or one-in-one-out rule), which stipulates that regulators must remove a regulation each time they introduce a new one that imposes an administrative burden on business. In 2017, fourteen OECD countries had adopted such an approach, up from nine countries in 2014 (OECD, 2018[10]).

In addition, systematic ex-post regulatory evaluation is being established in a number of OECD countries, although the tendency is observed to focus on partial ex post assessment of regulatory burdens rather than on whether underlying policy goals have been achieved (OECD, 2018[10]), (OECD, 2015[11]).

The adoption of behavioural insights (BI) is gaining popularity for strengthening a user perspective in policy making, achieving regulatory goals and increasing compliance (OECD, 2018[10]). Experiments and observations aim to address the behavioural biases of governments’ interventions, change the way policy is developed and public services are designed, and make government intervention more efficient and responsive to the needs and preferences of the public, factoring in behavioural barriers to compliance.

However, a 2017 OECD survey shows that while BI approaches have taken root across countries, they are still used primarily at the later design and implementation stages for new policies, rather than at the initial diagnostics stage (OECD, 2017[14]). This is often driven by the need to fill an implementation gap that may have been created by failing to properly consider implementation challenges in the early stages of policy design. Nonetheless, in a number of countries, governments are starting to use more BI to assess that behavioural barriers exist that prevent from achieving policy objectives, and update regulations and policies accordingly (OECD, 2018[10]) (Table 2.1).

Table 2.1. Designing “smart regulation” for SMEs: Selected country examples

Public consultation

Denmark

Business Forum for Better Regulation (2012, mandate broadened and extended in 2019)

Identifies areas where companies experience the greatest burdens and proposes simplification through enhanced consultation with the private sector. The new mandate gives the Forum greater capacity for addressing a broader range of burdens, including adaptation costs, i.e. “one-off” costs related to adapting to new and changed regulation, and strengthening the “comply-or-explain” principle, by which government is requested to specify in more detail to what extent a proposal is complied with.

EU

Better Regulation Guidelines (2015)

Range of stakeholder engagement methods that aim to enable stakeholders to express their views over the entire lifecycle of a policy. Approaches include inception impact assessments at the initial stage of policy development, a consultation strategy under individual initiatives, and consultation mechanisms on Commission proposals and their impact assessments once they are put forward to the European Parliament and the Council.

Flexible regulatory options

Austria

Impact thresholds in the RIA framework (2015)

Aims to improve proportionality in the RIA framework. The thresholds are based on various impact dimensions. If these thresholds are not exceeded, a simplified RIA may be conducted.

Korea

Tailored Regulatory Approach for SMEs (2016)

Aims to strengthen the principle of proportionality, whereby regulation is tailored in accordance to firm size and capabilities. In 2015, the government mandated the consideration of proportional regulatory alternatives in RIA on SMEs.

‘Stock-flow linkage’ rules

France

“One-in, Two-out” approach (2017)

Regulatory offsetting approach, whereby regulators must remove two regulations each time they introduce a new one that imposes an administrative burden on business.

Transposition of EU legislation.

The adoption of requirements going beyond those set by the EU measure is prohibited.

Germany

“One-in, One-out” rule (2015)

Introduced following recommendation by the National Regulatory Control Council. Under the rule, new burdens on businesses (‘In‘) must be fully offset elsewhere (‘Out‘). Compensation must take place in the course of one year if possible, alternately by the end of the legislative term.

UK

“One-in, Three-out” system (2016)

Scales up former initiatives “One-in, One-out” and “One-in, Two-out” implemented in 2010 and 2012 respectively that imposed to assess the net cost of complying with any proposed regulation and find one/two or three deregulatory measure(s) which relieves business of the same net cost. The United Kingdom has pioneered policy developments in this area.

Systematic ex-post regulatory evaluation

Australia

Post-implementation review (PIR)

Undertaken by government agencies when regulation has been introduced, removed, or significantly changed without an ex ante impact assessment, in order to ensure that regulations made in haste or without sufficient assessment can be re-assessed before they have been in place too long. This may ensure that distortionary effects or excessive burdens, which hit SMEs disproportionately, are removed in a short timeframe.

Behavioural insights (BI)

Netherlands

Behavioural Insights Network Netherlands (BI NL) (2014)

Brings experts from all ministries together, in order to share knowledge about the application of BI to policy-making, implementation, supervision and communication. The network meets on a monthly basis and organises various activities, including a monthly series of lectures, a training module for civil service trainees and the Behaviour Day conference. Against this background, experimentation with the use of BI has been carried out in various policy areas. For instance, BI-driven modifications in e-mail communication by the Netherlands Enterprise Agency have more than tripled the proportion of companies with a relatively high energy consumption that download a feedback report on their energy consumption, intended to foster energy saving.

UK

Crown Commercial Service Behavioural Insights Framework (2018)

Aims to promote greater use of BI in the administration by allowing public bodies procuring BI services to a range of organisations, including SMEs.

Behavioural Insights Team (BIT) (2010)

Aims to enhance public policies and services through the application of behavioural sciences (Box 2.2).

Box 2.2. Applying behavioural sciences to enhance public services: The UK Behavioural Insights Team (BIT)

In 2010, the UK government set up the Behavioural Insights Team (BIT), also known as “Nudge Unit”, with a view to applying behavioural sciences to the reform of public services and policies. Originally attached to the Cabinet Office, the BIT was transformed in 2014 into a social purpose company that is jointly owned by the UK Government, Nesta (the innovation charity) and BIT’s employees. Accordingly, the funding model has changed, individual departments paying directly for BIT advisory services and substituting original support by the government. Furthermore, over time, BIT, headquartered in London, has expanded in scale, up to about 150 employees, and in reach, with offices in Manchester, New York, Singapore and Sydney.

Composed by staff with strong academic grounding in economics, psychology and research methods or a background in government policymaking, BTI adopts a highly empirical approach to redesigning public services. Drawing on ideas from the behavioural sciences literature, tests and trials are conducted to understand what works and what does not work in public services design and delivery.

In this framework, BIT has launched Predictiv, an online testing platform (www.predictiv.co.uk) which can run tests from a representative sample of over hundreds of thousands of adults across the UK, in situations where it would take too long, be too complex, or too costly, to run a ‘real world’ experiment. In 2016, BIT created BI Ventures, in order to develop and scale-up products with a social impact. The first venture, Applied, is an online hiring platform that uses behavioural sciences to remove bias in recruitment processes (www.beapplied.com). The BIT has also developed tests for improving services for SMEs and entrepreneurs. A 2017 study assessed the impact of improved transparency in foreign money transfers on competition, consumers and SMEs. A controlled online experiment helped gather evidence on the types of fee disclosure that were the most helpful to small businesses for selecting suitable services. In 2017, BIT supported the Crown Commercial Service (CCS) to trial feedback on public procurement, allowing information on service quality to be shared across the public sector. Results indicated that feedback from public procurers can help highlight quality supply by smaller and less well-known businesses than larger businesses presenting more established brand and connections.

Source: BI (2018[33]), The Behavioural Insights Team Homepage, https://www.behaviouralinsights.co.uk.

Enhancing transparency and efficiency in public services and legal frameworks

Reforms have been enacted in many countries to strengthen public sector integrity and transparency, including as a response to declined confidence in national governments in the aftermath of the 2008-09 global financial crisis (Table 2.2).

Approaches include the establishment of codes of conduct and fraud risk mapping exercises, compliance with conflict of interest policies and asset declaration policies, improved transparency for lobbying activities, and anti-corruption guides for businesses, which are often developed in cooperation with business and industry associations.

Across OECD and non-OECD countries, governments have also taken steps to improve contract enforcement mechanisms. Greater efficiency in the court and legal framework is sought through simplification of proceedings and by increasing expertise in courts for commercial disputes. Over the last decade, specialised business or commercial courts were created or expanded, with the aim to improve the timeliness and effectiveness of commercial litigation. Some countries have invested significantly in digitalisation of courts in order to enhance their efficiency and ease information sharing, including with the public (Table 2.2).

Table 2.2. Strengthening public sector integrity and efficiency: Selected country examples

Code of Conduct and fight against corruption

Mexico

National Anti-corruption System (NACS) (2016)

Aims to address fragmentation in policies and develop a more coherent approach to integrity. The reform package includes a new governance structure for anticorruption policy consisting of a NACS Co-ordination Committee, a Citizen Participation Committee, and ethics committees in individual line ministries.

Netherlands

Code of Conduct for Integrity in the Central Public Administration (2006, updated in 2016)

Recognises the increased complexity of the arena in which civil servants operate, their more frequent and diverse contacts with citizens and social organisations, and the particular risks of online communications and social media.

EU

Anti-Corruption Toolkit for SMEs (ACTS)

A project funded by the European Commission and coordinated by the Italian Union of Chambers of Commerce with the participation of chambers in Belgium, Italy, Romania, and Serbia. In 2018, ACTS launched C-detector, a tool for self-assessment of corruption risk, created to support micro-SMEs operating in Europe in the implementation of appropriate measures to prevent and combat corruption.

Digitalisation of courts

Italy

Compulsory e-filing of documents and proceedings (2015 and 2017)

The electronic filing of documents for civil proceedings became mandatory in ordinary and appeal courts in 2015. In 2017, e-filing became compulsory also for administrative proceedings.

United States

Case Management/ Electronic Case Files (CM/ECF) system

Federal Judiciary's comprehensive case management system for all bankruptcy, district and appellate courts that enables to accept filings and provides access to filed documents online, offering expanded search and reporting capabilities. Over 2014-18, the federal system transitioned to a Next Generation infrastructure (NextGen CM/ECF), which simplifies access and use through an enhanced user interface and a single sign-on across federal courts.

Improving contract enforcement

India

Commercial Courts Act (2015)

Aims to enhance contract enforcement and the pace at which commercial disputes are resolved, and enacts the setting of separate Commercial Courts by State Governments at the District level. In states where the High Court exercises original civil jurisdiction, High Courts are expected to set up Commercial Divisions to deal with commercial disputes.

Alternative dispute resolution (ADR) mechanisms

UK

Small Business Commissioner (SBC) (2016)

Independent public body which provides general advice and information to small businesses on matters such as resolving disputes; signposts small businesses to existing support and dispute resolution services through its website; considers complaints about payment issues between small business suppliers and their larger customers, making (non-binding) recommendations on how the parties should resolve their disputes. The SBC was created by the Enterprise Act 2016.

EU

Online Dispute Resolution (ODR) platform (2016)

Aims to help EU consumers and traders solve disputes over both domestic and cross-border online purchases. The platform offers a single point of entry that channels the disputes to national Alternative Dispute Resolution (ADR) bodies which are connected to the platform and have been selected by the Member States according to quality criteria and notified to the Commission.

Enhancing the insolvency regime

Greece

Reform of the insolvency regime (2015-16)

Aims to speed up bankruptcies, enhance pre-bankruptcy rehabilitation plans and facilitate the discharge of entrepreneurs, thus favouring a second chance. In 2017, simplified procedures for bankruptcies of small enterprises were enacted, enabling expedite sales of movable and immovable property of bankrupt companies and faster termination of bankruptcies

Alternative dispute resolution (ADR) mechanisms are also increasingly supported to reduce litigation and backlog in courts and help SMEs resolve commercial disputes at lower costs. In some countries, dedicated digital platforms are in place to facilitate access to ADR services by businesses and consumers (Table 2.2).

Numerous countries have put in place measures to enhance efficiency in insolvency regimes. Measures are taken to improve timeliness in insolvency proceedings, while ensuring that the insolvency framework provides creditors with a range of opportunities to monitor the progress of an insolvency administration in which they have an interest. Approaches include simplified or accelerated insolvency procedures for SMEs, including through digitisation (G20/OECD, 2018[34]) (Table 2.2).

Leveraging digital technologies and Big Data for better public administration and regulation

Digitalisation opens up opportunities to simplify administrative procedures and improve public service quality and outreach (Table 2.3).

Dedicated platforms and infrastructure are set up to help SMEs and entrepreneurs liaise with the public administration and reduce administrative burdens. This includes digital “one-stop shops,” i.e. single entry points providing e-government services and online platforms aiming to reduce redundancy in public administration requests.

Digital technologies also hold the potential to help governments tackle the complexity of license systems.

New technologies and analytical tools, coupled with a large increase in the scale and scope of digital tools, are being leveraged by governments to facilitate and encourage tax compliance by SMEs. Two main approaches are observed, which reflects a systemic perspective on the SME business environment and activities.

  • The first, “tax compliance by design” uses technology associated with commercial transaction to create a seamless and secure flow of accurate tax information and payments.

  • The second, “advanced business analytics”, i.e. the application of statistical and machine learning techniques to uncover insights from data, is used to enable tax administrations to trace high risk taxpayers at an early stage and detect high risk tax returns. It also enables tax administrations to offer SMEs better targeted services and reduce the amount of information needed to comply. The focus by tax administrations on strengthening end-to-end processes has led to increased collaboration with other stakeholders and market players, including software developers (OECD, 2017[22]).

Table 2.3. The digital transformation of public administration: Selected country examples

The rise of “one-stop” shops

Switzerland

e-Government platform (EasyGov.swiss)

Offers a customer-centred and integrated approach to business-to-government interactions, overcoming silos between agencies and federal levels. The platform is exclusively dedicated to companies.

Portugal

Entrepreneur Desk (Balcão do Emprendedor)

On-line portal that allows access to a broad range of services and certificates to start and expand a business. In 2017, the services expanded, including a simulation tool to help entrepreneurs verify which legal and regulatory obligations are applicable to their activity and whether these are being complied with.

Chile

Escritorio Empresa

Aims to simplify business procedures. The platform is currently experimented by 40 municipalities.

2020 Digital Agenda

As part of its 2020 Digital Agenda, Chile proposes an increased offer of e-procedures for households and firms.

Germany

Online Access Act (Onlinezugangsgesetz – OZG) (2017)

Aims to expand and improve e-government services and ease access to services by citizens and businesses. The OZG Act requires the federal government and the Länder to offer their administrative services online within five years and to link their respective portals in a portal network.

Spain

SME platform

Offers entrepreneurs and SMEs a one-stop shop for accessing information along their entire life cycle and disseminating Spain’s SME Strategy. The SME platform is part of a range of measures taken within the Strategic Framework on SME policy 2030.

Reducing license systems complexity

Ireland

Integrated Licence Application Service (ILAS) (2017)

Online one stop shop for business licence, permit, certificate and registration needs that aims to simplify the licensing procedures to start a business.

Greece

Investment Licencing Law (2016)

Introduces the registration of new companies remotely through the e-one-stop shop and simplified licensing procedures, replacing ex ante licensing with simple notification.

Improving tax compliance

Chile

Electronic Invoicing System (2014)

Allows business taxpayers to issue and receive invoices that are immediately available to the revenue body. It also provides, free of charge a simplified and complete accounting system to business users. The Electronic Invoicing System is mandatory for all businesses. However, SMEs were granted a transition period to adjust. As of 2017, all businesses, including micro-enterprises, had been incorporated into the requirement.

Denmark

Tax-related guidance and functionality in accounting software (2017)

Embedding tax-related guidance and functionality in third-party accounting software solutions targeted to small businesses. The Danish Tax Administration (SKAT) collaborates with software developers for developing a user-friendly bookkeeping guide that was made accessible through third-party software in 2017.

Italy

Synthetic Reliability Index (2019)

Aims to promote tax compliance, transparency and dialogue between the administration and the tax payers. Based upon data of the companies and their respective sectors of operation, the Index determines acceptable levels of "tax reliability" as well as "anomaly" for a given economic activity. It allows the most reliable taxpayers to access a reward system, which offers several advantages, such as shorter deadlines for controls, exclusion from some tax controls and faster procedures for VAT reimbursements.

Other relevant aspects of institutional and regulatory framework for SMEs are related to:

  • Market conditions: e.g. regulatory framework and instruments for enhancing SME access to public procurement; taxation of foreign direct investments, trade restrictions, international regulatory coordination etc.;

  • Infrastructure: e.g. data privacy regulation, cybersecurity legal framework; energy and transport regulation etc.;

  • Access to finance: e.g. financial market regulation, investors protection and taxation, regulation of new digital funding instruments such as initial coin offerings and crowdfunding etc.;

  • Access to skills: e.g. labour market regulation (dismissals, hiring and firing, training); university laws and performance agreements; mandatory and compulsory curricula, skills and qualification frameworks etc.;

  • Access to innovation assets: intellectual property rights and IPRs enforcement, open data, regulation of new technologies etc.

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