Government Regulations Which Impact Start-Ups

Start-ups are private entities. It is true that start-ups thrive because of the resourcefulness and innovation of the people behind the start-up. However, the empirical data suggests something equally interesting. It is important to note that many successful start-ups tend to be located in the same geographic areas. This is because many times, governments in control of those geographic areas provide certain benefits to companies that set up shop over there. Hence, indirectly governments also have an important role to play in the start-up ecosystem.

In this article, we will have a closer look at some of the government policies which have a direct impact on the setting up and functioning of a start-up.

  1. Ease in Setting Up the Business: Starting a business can be very complicated in some parts of the world. In certain places, an entrepreneur is required to do some basic formalities such as the incorporation of a business, setting up a bank account, and obtaining a basic license. However, in other parts of the world, setting up the same operation can turn out to be a bureaucratic nightmare.

    Entrepreneurs may have to coordinate with different government departments. They may be required to obtain several licenses from these departments. It is also possible that corruption may be rampant within the government departments. The end result is that the cost as well as the time taken to start a business escalate rapidly.

    It is, therefore, no surprise that entrepreneurs prefer markets with simpler regulations. Hence, for a start-up ecosystem to thrive, the government must ensure that owning as well as operating a business should not be a nightmare for the founders.

  2. Tax Holidays on Operations: Start-up companies are short on cash in the earlier part of their lives. Hence, the same start-up companies would like to set up shop in locations where the tax burden is lower, particularly in the early years of their existence. This lower tax burden allows them to lower their costs and compete with the more established larger companies in the region. It is common for many governments to give certain tax holidays to start-up companies.

    Some governments provide these tax holidays only to companies operating within a certain sector. For instance, companies operating in the pharmaceutical or automobile sector may be given a higher tax break. This works as a win-win situation for the government as well as the start-up. The government ends up creating a hub for start-ups which will provide a lot of tax revenue at a later date whereas companies get a lower cost of operations in the earlier years.

    It is important to note that since a lot of businesses in the modern world are web-based, they can be operated from any part of the world. Hence, the preference for these businesses to geolocate in areas where taxation rules are more favorable is very high.

  3. Ease of Raising Funds: Only attracting start-up firms may not be enough to build a start-up ecosystem. Governments also need to attract investors who invest in such firms at early stages. Governments need to ensure that they provide a favorable tax regime to the investors. They also need to ensure that they have a well-functioning judicial system in place where the cost of enforcing a contract is not prohibitive.

    Many governments all over the world also have special funds which provide loans to start-ups at concessional rates. Funds are like oxygen for any start-up firm. Hence, if the government is able to ensure the availability of funds at a low cost of capital, start-up companies will flock to that state.

  4. Government Tender Requirements: In many parts of the world, the government procures goods and services for public consumption through open tenders. In many parts of the world, start-up companies are not able to participate in these tenders. This is because there are rules in place which prohibit companies that do not have a certain age or turnover from participating in such bids.

    If the government really wants to encourage the start-up ecosystem, then they must encourage start-ups to bid for government contracts. In many parts of the world, start-up companies are allowed and encouraged to bid on such contracts. This can be very helpful since government contracts provide economies of scale which can be used by start-ups to lower their overall cost of production.

  5. IPR Filing Laws: Governments must have laws in place which make it easier for an entrepreneur to file for intellectual property rights. The cost of filing for IPR should not be prohibitive. Also, the process should not be very complex or time-consuming. Both time and money are very critical for a start-up founder. Hence, governments that have a streamlined legal system attract a higher number of start-ups.

  6. Dissolution Laws: Last but not the least, it is common for start-ups to fail. In fact, empirical data suggests that the majority of start-up companies will fail. In such cases, companies are required to follow the government norms for winding down their business.

    In many parts of the world, winding down a business can be an expensive, time-consuming, litigious and complicated affair. Entrepreneurs tend to avoid operating in such countries. Hence, if a government wants more start-ups to operate from their geographical location, then they should simplify the laws related to the dissolution of a business.

The bottom line is that any business interacts with the government several times over its lifetime. Companies do not have the option of changing the government in the middle of operations. It can prove to be expensive and disruptive. Hence, governments need to take measures to ensure that a conducive atmosphere is in place.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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