Pollution Regulation as a Barrier to the Formation of Small Manufacturing Establishments: A Longitudinal Analysis



Small Business




United States Small Business Administration
Office of Advocacy
RS 147


Pollution Regulation as a Barrier to the Formation of Small Manufacturing Establishments: A Longitudinal Analysis


by Thomas J. Dean


1994. 43p. Yosemite Trail, Knoxville, TN 37909 under contract no. SBA-93-1060



Do environmental regulations hurt small business formation? The regulation on small business. Environmental risks are governed by more than 11,000 pages of federal rules and regulations, promulgated by a variety of federal acts. In addition, more than $100 billion is spent annually to comply with federal environmental regulations.

This research focused on the question of whether these actions favor large existing manufacturers at the expense of small new manufacturers. To the extent that the formation of small establishments are dissuaded by onerous environmental regulations, large establishments are provided with a competitive advantage and pollution-intensive industries will likely evolve toward greater concentration.

Viewing environmental regulation as a potential barrier to small manufacturing establishments, this study examined three primary questions: (1) What is the nature of the effect of environmental regulations on the formation of small establishments, (2) How has that effect changed over time, and (3) How do environmental regulations affect small establishment formation compared with large establishment formation.

Scope and Methodology

Economic theory predicts that environmental regulations deter the births of small establishments through resultant increases in the minimum efficient scale of plant operations. Regulations impose higher costs by requiring more complicated business administrative and operational activities. Regulations also create more difficult facility siting and permitting procedures.

This analysis used a mediated regression methodology on a sample of 202 four-digit Standard Industrial Classification (SIC) code manufacturing industries for three census years (1977, 1982 and 1987). A regression model of small establishment formation was estimated for each of the three periods; these regressions were compared with models of large establishment formations. The mediated regression methodology allows for a determination of whether the barrier effects operated through an increase in industry minimum efficient scale or through other mechanisms.

The researchers selected establishments as the unit of analysis because data on small independent firms - the ideal measure for this study - are not available. The data sources used in the study include the U.S. Small Business Administration's U.S. Establishment and Enterprise Longitudinal Micro Data file, and the U.S. Department of Commerce's Census of Manufacturers, Annual Survey of Manufacturers, Survey of Plant Capacity, and Report of Pollution Abatement Costs and Expenditures.

Small establishments are, however, likely to be independent firms. Moreover, the robustness of the results of comparisons of small and large establishments refutes the notion that the results are biased by the chosen unit of analysis.


  • Environmental regulations exert a remarkably consistent deterrent effect on small establishment formation over the three periods studied. The nature of the effect, however, changed over time.
  • In 1977, the deterrent effect of environmental regulations operated exclusively through increases in the minimum efficient scale of production.
  • In 1982 and 1987, increases in efficient scale accounted for only part of the deterrent effect of environmental regulations on small establishment births. The deterrent effect in these years shifted to other mechanisms such as the higher costs of increased business complexity and growing difficulties in siting and permitting of new facilities.
  • Environmental regulations exerted less of a deterrent effect on the formation of large establishments than on small establishments. In the statistical tests used to analyze the formation of large establishments, the coefficient for pollution-abatement intensity was statistically insignificant in all three periods.

Ordering Information

The complete report is available from:

National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)

Order Number: PB95-100277

Cost: A03; A01 Microf.

*Last Modified 6-11-01