States Can Bolster Innovation by Removing Regulatory Barriers to Entrepreneurship

Innovation and entrepreneurship are two fundamental drivers of America’s success as the number one economic engine in the world. However, even in our nation’s top economic hubs, new startups continue to face serious challenges in today’s economic environment. The National Federation of Independent Business found in a recent survey that over half of small employers polled reported substantial impacts to their business resulting from inflation, forcing business owners to absorb the additional costs, increase prices, or sacrifice quantity or quality of goods and services.

States should consider how they can ease these burdens by embracing market-driven, limited government policy solutions. ALEC recently convened a policy discussion on “Removing and Reducing Regulatory Barriers for Entrepreneurs” to educate lawmakers on the costs and consequences of overregulation while providing actionable steps to foster entrepreneurship and innovation in their home states.

Dr. Justin Callais, Research Fellow at the Archbridge Institute and lead researcher for the Social Mobility Index project, offered a synopsis of his latest study on “Economic Mobility, Business Dynamism, and Barriers to Entrepreneurship”. Archbridge found strong correlations between the environment for entrepreneurship and economic mobility across countries, especially regarding business and labor market regulations. Compared with other countries, the United States scores highly on the regulation component of economic freedom. However, business dynamism—a metric measuring entrepreneurship growth and mobility—has steadily fallen in recent years.

Archbridge identified four free market solutions to reverse this trend and increase U.S. business dynamism: (1) low-income jobs, (2) Make access to private sector credit easier, (3) Improve quality and choice in education, and (4) Lower taxes and implement fewer regulations overall. ALEC’s Right to Start Act and Occupational Licensing Review Act model policies echo this commitment to foster and create a conducive and favorable ecosystem for entrepreneurs.

Alex Reinauer, Research Fellow at the Competitive Enterprise Institute, discussed the role of technology in entrepreneurship and the growth of small businesses. The platform economy has created avenues for small businesses to advertise their products and access more customers. While it may be easy for online vendors to switch platforms, it can be difficult for home-based businesses to navigate the “regulatory thicket,” impeding innovation. Top areas for reform include zoning (see ALEC’s Home-Based Business Fairness Act model policy), permitting, and licensing.

Finally, sharing their first-hand perspective in the business world, representatives from the company PrizePicks discussed past, present and future innovation in the ever-changing daily fantasy sports industry. Despite the enormous economic potential in this dynamic and fast-growing industry, some operators of daily fantasy sports contests like PrizePicks have encountered regulatory barriers along the way. States should pursue pro-innovation policies that clarify the legal landscape for novel products and services, following the example of ALEC’s Fantasy Sports Contests Act model policy.

Our panelists offered many practical first steps lawmakers can take to lessen regulatory burdens, such as opening a dialogue with state regulatory agencies and launching a holistic regulatory review commission. ALEC’s Essential Policy Solutions for 2023 is the definitive handbook for state lawmakers looking for thoughtful and impactful model legislation rooted in the principles of limited government, free markets, and federalism.

Some states like Ohio have pursued this approach to help streamline the regulatory environment and encourage business growth. State lawmakers can take additional action by reducing the fees to start a business, shortening wait times for permitting and licensing, and lessening the burden of paperwork and compliance costs. It is fundamental for states to create a regulatory environment that provides flexibility, supplementation, and freedom in business creation.