Regulatory Quality and New Business Formation in East and Southeast Asia: Nonlinear and Heterogeneous Effects

Abstract

This study examines the relationship between regulatory quality and new business formation across 13 East and Southeast Asian economies from 2006 to 2022. Combining the World Bank’s Worldwide Governance Indicators (Regulatory Quality, WGI-RQ) with World Development Indicators (new business density and macro controls), we estimate two-way fixed-effects models with country-clustered and wild-cluster bootstrap inference. On average, we do not find a robust partial association between WGI-RQ and new business density. Instead, the relationship is nonlinear and state-dependent: a quadratic specification indicates concavity (diminishing marginal association at higher WGI-RQ), and a median-threshold model shows a flatter slope at low baseline WGI-RQ and a more negative slope at higher WGI-RQ. Neither digital intensity (internet use) nor the post-2020 period significantly moderates this linkage once year effects are absorbed for common shocks. Results are robust to country-trend adjustments, lagged WGI-RQ, percentile scaling, leave-one-out checks, and distribution-sensitive estimators (conditional quantiles and RIF-OLS). Policy implication: “better rules” do not uniformly raise firm entry; payoffs depend on where countries start on the institutional ladder. Foundational governance upgrades are necessary but may require complementary reforms (such as finance, skills, and markets) in settings with weak institutions, whereas additional rule refinements in strong-institution contexts yield incremental returns.