Building a business is difficult all on its own, and the obscure government red tape surrounding most industries can make it extremely difficult for SMEs to survive. It’s no surprise then that business-friendly politicians and small business owners often advocate cutting regulations and slashing red tape. Surprisingly, however, that might not be an ideal solution.
By definition, red tape keeps businesses from operating as freely as possible, but there’s also a good reason that the world’s most powerful economies are those with the most complex regulatory environments. Oversight and regulation provide some critical benefits that more than make up for the negatives, provided that the businesses operating in these systems understand them, and know how these can help their businesses.
1. Long-term product improvement
Regulations keep businesses from cutting corners, and this can have very positive consequences for your products. By mandating high quality standards, regulators can keep low-cost and low-quality competitors from driving higher quality producers out of business.
For example, a business might produce cheaper, low quality products that look like higher quality products to undercut a qualitatively better business in the short term. Natural market feedback mechanisms might not react quickly enough to save the original business, leaving consumers with less choice and lower quality goods. To prevent this from happening, the quality oriented business would need to preemptively drive down prices and focus on cost instead, leading to lower quality goods overall as well.
A government mandated quality standard can force businesses to find ways to cut costs that don’t interfere with product quality if they want to compete with other businesses in that economy. To do that in a competitive environment, they’ll need to develop new techniques and technologies that push their industries forward instead of just finding new ways to cut corners.
2. Marketing opportunities
Whether it has to do with managing pollution, consumer health, safety, product efficacy, or local tax revenues, rules and regulations are designed to do something for consumers. By being in compliance, businesses are serving the public, and that makes them more marketable. It’s important to educate target markets about what your business does to protect their interests, and to reinforce how this makes your business preferable to competitors.
3. Easier international growth
While it’s certainly harder to start a new operation in a highly regulated business environment, doing so makes it significantly easier to grow in the long term. Businesses that start out in lax environments with very little red tape have to go through a lot of trouble to adjust their operations to comply with international regulations and to manage bureaucratic issues in each new country that they seek to expand into.
If your business has established itself in a highly regulated environment like Australia, New Zealand, or the UK it doesn’t have to overcome the kinds of barriers when expanding its operations into other countries that other business might. Not only is it significantly easier for you to adapt to new regulatory environments, your business might also enjoy a competitive advantage over domestic competitors in less well-regulated economies. International customers understand that your business can’t and doesn’t cut corners in the way that local options might, which leaves those competitors with the burden of proving that their product can match up to yours in terms of quality, even though they might already be well established.
4. Barriers for competition
The same issues that cause headaches for your business will also slow down other new entrants to your industry. Once you’ve made the initial cut, the system begins to work in your favour as an incumbent business. Not only will new competitors need more resources to establish themselves, they’ll need time to get the proper certifications and to set up their operations to meet regulatory standards. This gives existing businesses more of an opportunity to become aware of and prepare to deal with them.
More importantly, red tape also works to entirely prevent unfair competition. As an extreme example, it’s illegal nearly everywhere to make false health claims about medicinal products. An unscrupulous entrepreneur who decided to attempt to sell ground tree bark as a cure for tuberculosis wouldn’t be allowed to label their product as proper medicine, but would be forced to sell it as a supplement. This kind of red tape can seem irritating when it’s applied to less life-threatening issues, but it keeps properly certified and tested products separate from random, potentially unreliable competition.
Red tape slows down and even kills many small businesses, but its purpose is to build a more reliable and robust economy overall. It protects consumers and bolsters their confidence in local businesses, and provides a support structure designed to favour businesses who produce higher quality goods over those who primarily target short term profits. By taking the time to understand the extent and purpose of the red tape surrounding your own industry, you and your business can use it to gain an advantage both at home and abroad.