Has new business creation in Russia come to a halt?

Successful transformation of centrally planned economies requires not just the privatization of the existing firms, but also the formation of new ones . New entrants serve to correct for the central planners' neglect of such s ectors as services and consumer goods, and their bias in favor of large fir ms. Indeed, Central European economies have been experiencing a rapid rare of new business creation, as measured by the change in the number of small firms. Russia also experienced a short period of explosive growth in the nu mber of new business. However, since 1994 net new business formation has st agnated. This paper looks into the possible causes of this phenomenon. Official data on the change in the number of small businesses, which serve as a proxy for net new business formation, arouse justified suspicion becau se of the frequent changes in the definition of "small enterprise. " Like e verywhere in the world, same Russian registered firms do not become operati onal, and some firms that have ceased operations do not legally disband. If the share of these "dead souls" in the total count of small firms changes over time and official statistics does not adjust its count accordingly, th e data may show the opposite of the actual processes. This paper analyzes R ussian data collection procedures and other evidence, and concludes that st agnation in the new business formation is a real phenomenon, rather than a statistical artifact. The difficulty in finding out the causes of stagnation is that empirical st udies focus on the existing businesses and miss those that should have been born but were not. The problems faced by the incumbents and frustrated ent rants may well be different. The likely causes of the end of new business c reation are the increased tax and regulatory burden, combined with plunder by the numerous Tax and regulatory authorities Other possible explanations involve the incumbents' use of the authorities and/or racketeers to erect b arriers against new entrants. (C) 1999 Elsevier Science Inc.