A policy evaluation of the reform "Empresa na Hora"

This paper studies the effects of the 2005 reform Empresa na Hora (Firm on the Spot) on firm entry, exit, and employment decisions. Before the reform, starting a business implied a long and convoluted bureaucratic procedure that would take between two to three months to complete. After the reform, the duration of this process decreased to less than one hour. It also involved a substantial reduction in the monetary costs associated with firm creation.

Exploiting the gradual implementation of the reform across Portuguese municipalities, the authors show that the reform succeeded in increasing business entry from 2005 to 2008. The estimates suggest that the number of new firms in the reformed municipalities increased on average by 25 percent per year relatively to non-reformed municipalities. The Figure shows the annual growth in the number of entrants at the municipality level over time before and after the reform.

The increased number of firms produced increased employment. The authors document that after the reform, local employment increased on average by 4.8 percent per year in the reformed municipalities relative to the non-reformed ones. Consistent with the intent of the policy reform, an investigation of the micro-level mechanisms shows that about 40 percent of the increase in employment comes from the rise in the number of entrants. At the same time, the significant growth in employment that occurred in incumbent firms after the reform may be partially explained by the economic dynamism generated through the entry of new firms.

Click here to go to the paper by Sónia Félix and Chiara Maggi.