Business Regulation Effects How Rules Shape Markets

Title: Business Regulation Effects: How Rules Shape Markets.

Any business is run in a set of regulations. Others are self-evident - tax regulations, licensing, safety measures. Others are less noticeable--zoning laws which determine where a shop may be located, data protection laws which govern the handling of information of customers and labor laws which govern what a position must offer. These rules, when combined, form the environment that sees businesses being ruined or lifted to heights. The role of regulation and its influence on markets is an issue that every business person, investor, or policy maker on a business issue must grasp.

The concept of regulation is commonly discussed within the scope of burden. Complaints of paperwork are raised by business owners. Economists take note of compliance expenses. Red tape is supposed to be reduced by politicians. However, regulation is not only a problem. It is the structure of markets. Markets can not operate without rules. Consumers are not able to believe that food is safe. Shareholders do not have a belief that financial reports are true. Employees do not have the assurance that they would be remunerated. The question is not how whether should be regulated or not but how.

Regulation Creates Trust

Credibility is the key to business. All forms of transactions require a degree of trust between the customer and the seller. The construction of the regulation creates that trust through minimum standards. When purchasing packaged food you trust that it is safe in that it has to pass an examination and labeling that is regulated by law. In depositing the money with a bank you are convinced that it will be there due to the capital reserves that banks are required to have and that they are also checked. Once you employ a contractor, you have confidence that they are qualified since licensing involves interview of professionalism.

This trust is not automatic. It is established by rules that shun bad actors and generate accountability. Markets that lack such controls are dominated by frauds and exploitation. In the informal sector in most of the African economies, it is an expression of what occurs when formal regulation is not in place. Business is based on trust and promotions. At least that is true of small local exchanges but it inhibits growth. A company that would wish to expand outside of its immediate community has the provisions of the regulation that it of trust.

Competition is determined by regulation.

Regulations determine the entry of competitors and how. The ease of entry to a business is characterized by the rules of entry, i.e. licensing, permits, capital requirements. When they are high then the existing businesses get less competition. They are low and will result in increased entrants and innovation. There is a trade-off in both outcomes.

The regulatory design power is vivid in the telecommunication industry in Nigeria. As the industry was opened to the competition in the early 2000s, the market was flooded by new entrants. Prices fell. Coverage expanded. Millions of people got access to mobile phones. This competition was determined by the regulatory framework: licensing, interconnection, etc. It avoided a winner-takes-all competition on the market but enabled a profit to be made to bring investment.

On the other hand, industries that are restrictive in terms of entry tend to stand still. When only the established players are allowed to compete then the prices remain high, innovation becomes stagnant and the consumers are left with less options. The regulators have to offer stability as well as safety coupled with the advantages of competition.

Regulation Manages Risk

All business ventures are risky. The regulation compels the companies to take risks internally that they would have otherwise disregarded. In the environmental regulations, the defaulters are made to pay, the cost of their pollution. The safety laws demands that manufacturers produce products that will not cause harm to the users. Bank regulations also mandate the banks to have capital in case they incur losses.

Such regulations ensure that the business does not end up privatizing their profits and socializing their losses. A plant dumping waste to a river would benefit due to decreased disposal expenses and the community due to the pollution expense. This is rectified by regulation where the factory pays in order to have the disposal done properly. On the same note, a bank that makes too much risky returns to its shareholders can send taxpayers home to bailout the bank when the risks prove to be fatal. This is thwarted by capital requirements and oversight.

To African economies which are developing an industrial capacity this regulation role is very important. Increased manufacturing leads to increased opportunities when it comes to environmental degradation. There exists increasing potential systemic risk in line with increased financial sectors. Properly designed regulation allows the growth to continue with neither environmental harmages nor financial volatility.

Regulation brings about predictability.

To invest, businesses require predictability. When a factory takes years to construct, it is assured that the regulations will not alter at any time without notice. Any company that is going to venture into new markets should be aware of the compliance costs beforehand. Regulation gives this predictability where it is uniform, clear and applied in uniform manner.

This issue comes about when regulation is erratic. Unpredictability is caused by frequent changes, selective enforcement, or discretionary decisions of officials, and all of it chokes investments. A company that is not in control of what it will pay to the government, what license they will require, and what criteria they will have to complete was never helping them to plan ahead. Small businesses have become the most affected by this uncertainty since they do not have the resources to adapt to ever-changing demands.

The Cost of Compliance

Real costs are also imposed by regulation. Entrepreneurs waste time and money in documents and inspections, legal consultation, and reporting. In principal firms, these expenses can be handled. In the case of the small business, they may tend to be prohibitive. A small business can be a micro-enterprise employing few workers and makes a huge percentage of its income spent on the licensing fee, filing tax, and safety regulations.

This brings about a hard trade-off. The very regulations that safeguard consumers and workers are able to deprive small businesses of formal markets too. The presence of large informal sectors is a major fact in many African economies due to the fact that it is too expensive to comply with formal regulations when having small businesses. The consequence of this is that large numbers of businesses are running beyond the regulatory sphere, and they do not enjoy the advantages of formalization access to credit, protection of law, and also do not enjoy protection of regulation.

Reform and Balance

Regulatory reform is not aimed at abolishing rules but to make them smarter. This involves coming up with requirements that realize their goals and do not place unnecessary costs. It engages in streamlining processes such that it does not need to engage the specialists in order to comply. It implies operating technology to minimize the paperwork and accelerate approvals. It refers to consistency and predictability of enforcement.

Regulatory reform is taking place throughout Africa. Countries are computerizing the business registration, facilitate licensing and establishing one-stop shops where the permits can be obtained. These reforms appreciate the fact that a well-managed market is not an unregulated market. Regulations that shield but do not suffocate, regulations that foster confidence and do not pose obstacles, regulations that control risk.

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