Boosting Business in Regions

Executive Summary

Businesses thrive when their surrounding environment supports entrepreneurship, investment and growth. The business environment has an important spatial dimension that shapes firms’ access to finance, infrastructure, skills and technology. Firms may be part of local clusters, collaborate with local research institutions, such as universities, to upgrade their products and processes, and work and compete with other local firms. They need to obtain permits, pay local taxes, attract employees from their surrounding area and reach their customers and suppliers, while working within the regulatory framework set at local, regional, national and even supranational levels.

This report considers two specific aspects of the regional business environment that are critical to firm performance. The first is regional institutional quality, encompassing efficient rules and regulations, the cost of compliance processes and the capacity and integrity of institutions enforcing them. The second concerns regional differences in access to finance, particularly debt-based finance, the primary source of external funding for most firms.

Boosting business in regions by promoting efficient regulation, reducing administrative burdens and combating corruption

Both national and subnational governments play a role in improving institutional quality. Most rules and regulations are set at the national level, but subnational governments often have important or leading roles when it comes to regulation related to land-use, business licensing and business registration. Even in regulatory areas that are usually set at higher levels of government, such as labour regulation or safety requirements, subnational governments can reduce administrative burdens by facilitating compliance through tools such as tailored checklists, plain-language guides and triage questionnaires targeted to the firms operating in their region.

Simplifying permitting and business licensing can foster business creation and boost growth in regions. In the period 2018-21, in a quarter of the 229 large (TL2) regions with available data, it took more than two months to obtain an operating licence, with a difference of more than one month between the slowest and fastest region in two-thirds of the 31 OECD Member and accession candidate countries with available data. Regions where it took more than two months to obtain an operating licence saw 25% fewer firm creations compared to regions where licences were issued in less than a month.

Another area where subnational governments play a central role is land-use regulation. Reviewing and removing unnecessary geographic restrictions can reduce housing costs, attract workers and investment, and thereby foster competition among firms, boosting innovation and productivity. Allowing more mixed-use neighbourhoods and moving away from single-use zoning could increase housing supply and encourage workers to move to productive regions, boosting overall productivity.

Ensuring regulatory efficiency means designing rules that achieve their goals, such as fair competition, environmental protection and worker safety, without imposing unnecessary burdens. In some cases, this may involve simplifying rules; in others, improving compliance processes and supporting firms through those processes may be sufficient or even necessary to boost business.

Efficient regulation may benefit particularly small firms in less urban regions, which often have few resources available for regulatory compliance. In big cities, firms tend to be larger and have access to a wider pool of expertise, such as business services, which can compensate for more complex licensing rules and longer waiting times. On average, 15% of firms consider obtaining a business licence a severe obstacle to their operations in regions with big cities, compared to 22% of firms in regions with no urban centres or small cities, even though firms in regions with big cities wait twice as long, on average, for their licence.

Regulatory efficiency needs to be maintained over time, for instance by using regulatory impact assessments and reviews to prevent unnecessary complexity. In rapidly evolving sectors, agile approaches with short evaluation cycles can help regulation keep pace with technological progress. For example, California (United States) and Hamburg (Germany) have introduced regulatory sandboxes for autonomous vehicles, defining controlled conditions for their use on public roads in order to balance safety with innovation.

One-stop shops simplify regulatory compliance by providing a single point of information and contact for the main events in a firm’s life, such as set-up, licensing, registration and deregistration. As of 2024, at least three-quarters of OECD member countries had a national one-stop shop providing businesses with basic information about set-up and registration. Where national one-stop shops exist, subnational governments can complement them by providing locally relevant information. For example, in 2020, BizPal, Canada’s digital one-stop shop that helps businesses identify permitting requirements at all levels of government, held more than 15 000 permits, including zoning and road use information from more than 1 000 municipalities. Furthermore, subnational governments can set up complementary platforms providing region‑specific information, such as local permitting requirements. For instance, the Italian region of Veneto created a platform for small agricultural businesses, which included manuals that explained food safety rules for products relevant to the region. In the 25% of OECD Member Countries with no national one-stop shops, regions may consider building their own to serve businesses active on their territory.

A digitally enabled “once-only” approach to government services can lower compliance costs for firms and promote transparency in interactions with public officials. By drawing information directly from official data sources, such as employment and business registries or financial transactions, digital government services can avoid repetitive inputs and reduce administrative burdens, for instance by enabling the automatic pre‑filing of tax returns. While this would impact all firms wherever they were located, it would particularly benefit small firms in regions with no urban centres or small cities, where 35% of firms find tax administration a severe obstacle to their operations, almost twice the 20% in regions with large cities. In regions with no urban centres or small cities, there are fewer opportunities to access professional business support and firms are, on average, smaller than in other regions, making compliance costs higher relative to their size.

Promoting regulatory efficiency and the once-only approach has the co-benefit of reducing opportunities for corruption by reducing complexity, limiting the discretionary powers of civil servants and improving the predictability of decisions. By promoting more efficient interactions with government services, digital tools can reduce firms’ incentives to seek informal solutions to administrative problems, lowering corruption alongside administrative burdens, especially in regions where corruption remains a challenge. The gap between the region with the highest and lowest shares of firms that consider corruption a severe obstacle to their daily operations was more than 10 percentage points in nearly half of the 31 countries with available data for the 2018-21 period. Overall, in half of the 229 TL2 regions, more than 10% of businesses reported corruption as an obstacle, creating a drag on the regional economy. Reducing corruption by 10% while keeping national factors constant could increase regional GDP per capita by 0.6%, reflecting both the indirect benefit of reduced corruption-related uncertainty in the regional business environment and the lower direct costs for firms, such as bribes and time spent negotiating informal agreements.

Boosting business in regions by improving access to finance

Some firms, particularly SMEs, struggle to access external finance for their operational and investment needs. In half of the 229 large (TL2) regions spread across 24 out of 31 OECD Member and accession candidate countries analysed, at least 10% of firms reported access to finance as a severe obstacle to their current operations. In a tenth of the regions with available data, more than a third of firms declared access to finance as a severe obstacle. This is also reflected in differences in bank lending. In 2021, SME lending as a percentage of regional gross domestic product ranged from 5% to 29% for the five OECD countries with available data, with a gap of at least 10% between the region with the lowest and highest percentages in each country.

An indirect measure to assess the conditions for access to finance is the availability of banks in a region. While there is an increasing number of online-only banks for consumer banking, fewer than 1% of firms in the 13 OECD Member countries with available data relied on an online-only bank as their main bank in 2019. The greater the variety of banks available to firms in a region, the greater the competition for supplying firms with funding, which can lead to higher credit supply and better borrowing conditions. Firms in regions with a metropolitan area have access to almost twice as many banks as firms in regions without a metropolitan area. The physical distance to the nearest bank is also shorter, which facilitates the flow of soft information, i.e. non-financial information, on which SME lending relies. However, a large number of banks does not guarantee competition and therefore better access to finance. Even if a region has access to many banks, the market may still be concentrated among a small number of players – in half of the 1 009 small (TL3) regions in 13 OECD countries with available data, at least two-thirds of firms were banking with one of the three largest banks in each region.

Addressing regional disparities in access to finance can lead to higher employment and productivity. Less concentrated regional banking markets provide firms with more choice in their suppliers of capital, promoting growth. Take the Spanish region of Valencia and the Polish region of Lower Silesia. Although both regions have a similar number of active banks (51 in Valencia and 49 in Lower Silesia), more than half the firms in Valencia rely on one of the top three banks in the region, whereas in Silesia the share is closer to one-third. Estimates suggest that reducing bank concentration in Valencia to levels observed in Lower Silesia could translate into substantial economic benefits, including up to 120 000 new jobs (0.2 additional employees per establishment on average) and an increase of 1.3 percentage points in labour productivity growth.

National and subnational governments can use a range of measures to improve access to finance at the regional level, especially for SMEs. Financial measures include grants, direct government loans, credit guarantees, equity financing (e.g. public venture capital or angel funds) and hybrid instruments such as mezzanine finance. Public development banks are key actors in delivering these measures – two-thirds of SME policies promoting access to finance, particularly in equity finance, are implemented by public development banks. Often, financial measures are combined with non-financial ones, such as capacity‑building initiatives that improve financial literacy, which can help businesses understand, find and access the financing they need.

Public credit guarantee schemes are the most common tool used to improve regional access to finance, with all 38 OECD countries using credit guarantees in some form. Empirical evidence from across OECD countries has linked public credit guarantees to positive effects in the region. National and subnational governments provide guarantees, often targeting firms according to their size, sector or location. In 2021, the stock of public credit guarantees was equivalent to between 3% and 6% of regional GDP in Portuguese and Italian regions – the highest shares among OECD countries with available subnational data.