Should we welcome 'red tape'?

Posted in: Business and society, Entrepreneurs, Governance

In many circles regulation is maligned as a financial burden, and thought to stifle creativity and innovation. But is this reputation fair? Here Rob Branston and Marc Betton discuss their new research which suggests unrecognised benefits to 'red tape'.

Regulation, a set of rules created by governments, are designed to ensure that businesses comply with minimal standards thought to be in the public interest. These rules are more extensive than you might think as they cover everything from who can be employed and on what terms, to the way buildings are designed and constructed, all the way to how food is prepared, grown and sold. Most recently we have seen them extended in our Covid-19 affected world to restrict what business could stay open and now, how some can start to safely re-open.

Small business owners often bemoan the financial cost of this ‘red tape’ but our new research suggests that they can take heart that regulation does have some benefits, both for them and society, although these have been widely overlooked.  Regulation is usually perceived as just a costly burden that hinders success, so its reputation may have suffered from previous academic research that has failed to give businesses the chance to reflect on the positive effects that exist alongside the costs. We can see this very clearly in recent months. Many small business have suffered from Covid-19 related restrictions, but by staying closed they have helped society reduce Corona virus infections, and also had time to perhaps innovate.  For instance our local pub has started to offer delivered meals since it can’t seat patrons, while other local businesses have been decorating premises since they are closed, or are catching-up on neglected paperwork.  While these don’t diminish the immediate financial costs, they do offer possible future business opportunities once the immediate crisis is resolved.

Our research has therefore explored the idea that a true assessment of regulation needs to consider both its burden and value, and also how these independently impact on the performance of organisations.  Regulation can clearly have a financial cost – just ask any firm closed in our Covid-19 world - but small businesses are often about more than just money.  Many owners of the smallest businesses, so called micro-firms, are particularly interested in a wider set of business goals, including being your own boss, flexibility, meeting new people, and providing employment opportunities.  Money clearly matters given the need to stay in business, but some of these wider goals for a firm can actually be boosted by regulation, such as ensuring a level playing field in the industry so firms don’t suffer unfair competition from unscrupulous rivals not meeting minimum standards.

We explored such ideas in the case of the English Tourism industry.  We found that the costly burden of regulation is associated with reduced financial performance, while the benefits of regulation are associated with an increased appreciation of wider business goals being achieved.  Surprisingly we also found that the average sense of the benefit from regulation was actually greater than the average sense of its financial cost, suggesting the ‘red tape’ label of regulation might be somewhat unfair.

We are currently living through a strange and unprecedented time, which will no doubt be explored and discussed for many years to come. Sadly, many firms will struggle to survive these unique circumstances, given the need to change the controls on businesses and society in light of Covid-19.  On this occasion the benefits of doing so - on a societal level - were clear to individual business owners, their employees, and their customers. Going forward all changes to regulation need to clearly identify what benefits will be created, both to society in general but also to the businesses who will need to deal with any immediate financial costs involved.  By doing so firms might grumble less about ‘red tape’ and instead have a better appreciation of the good that such regulations can create.

Find out more about the research here.

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Posted in: Business and society, Entrepreneurs, Governance


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