Across OECD countries, policymakers are placing renewed emphasis on regulatory simplification. Governments are seeking to cut red tape and make it easier for firms to grow.
For small and medium-sized enterprises (SMEs), these efforts are particularly important.
Yet their ability to grow is too often shaped not by any single piece of legislation, but by the accumulation of permits or reporting requirements, that pile up across different levels of government.
Why SMEs feel regulation most at the local level
SMEs face a fundamentally different regulatory reality than large firms. Large firms have resources to absorb potential regulatory friction. SMEs, for the most part, do not.
What may appear manageable for a large corporation becomes a disproportionate burden for a small business owner.
For a small business owner, navigating a complex web of administrative requirements is not a back-office task, it is a personal one, often handled alongside everything else that keeps the business running.
The OECD data on this are striking. In half of OECD regions with available data, obtaining an operating licence takes more than a month and in a quarter, it exceeds two months. These are not administrative footnotes. There are delays that affect investment decisions and market entry timelines. Hence, they fall disproportionately on firms that cannot afford to wait.
The hidden costs of fragmented subnational regulation: What are the challenges?
For businesses, the issue is rarely regulation itself, it is fragmentation. Regions where obtaining a licence takes more than two months record firm creation rates around 25% lower than in faster-moving regions.
But fragmentation does not only affect market entry, it also constrains firms’ ability to scale. As SMEs expand across regions, they must navigate multiple local administrations with differing requirements, multiplying compliance costs as well as uncertainty.
Fragmentation also reaches beyond the firm itself. Regulatory incoherence affects access to finance, disrupts integration into value chains, and undermines the public support schemes that are meant to help SMEs in the first place. Complex administrative processes can prevent businesses from accessing the very measures designed to assist them.
The implication for policy is straightforward. Simplifying and aligning regulatory frameworks is not just about cutting red tape. It is about unlocking growth that is currently being left on the table.
What does regulatory simplification look like in practice?
Simplification is not about removing safeguards. It is about ensuring that regulation achieves its objectives without piling on unnecessary process. In that sense, effective simplification is a core part of better regulation, not a weakening of it.
In practice, some countries have already moved in this direction. For example, Portugal’s Simplex programme and France’s France Simplification initiative illustrate how national efforts can help address administrative bottlenecks by coordinating across ministries and responding directly to challenges identified at the local level, with a focus on resolving concrete procedural obstacles.
“Think small first” approach could be a solution, requiring regulation to be designed and implemented with an explicit consideration of SMEs’ capacity to comply. In practice, that means four things.
- Simplification must target administrative processes, not just the rules themselves.
- Access to clear, centralised information needs to be treated as a policy objective in its own right.
- Digitalisation should be a core enabler, not an afterthought.
- And regulatory stability matters as much as simplicity for SMEs, predictability is a precondition for investment, and frequent or inconsistent changes can be as damaging as complexity itself.
The importance of coordination across levels of government
Simplification at the subnational level cannot happen in isolation. In most OECD countries, where regulatory responsibilities are shared between multiple stakeholders, unclear boundaries can create inconsistencies.
For businesses, this translates into longer procedures and higher compliance costs, especially when firms must navigate multiple administrative layers.
Effective coordination requires both clear allocation of responsibilities and interoperability between systems, supported by digital infrastructure and shared databases to reduce duplication.
It also requires better data on where delays occur and how firms experience regulation, to ensure evidence-based policymaking is grounded in real business experience.
Looking ahead: Key takeaways for policymakers
The case for simplifying subnational regulation is well established. What is less clear is how to move from political commitment to operational change. A few priorities stand out
- Reform should begin with evidence. Data and direct business feedback are essential to identify where delays and friction are highest.
- Digital tools, including one-stop shops and once-only data submission, are important levers but remain unevenly implemented.
- SMEs must be systematically involved. Structured dialogue between businesses and policymakers is essential, as illustrated by initiatives such as the OECD Digital for SMEs Global Initiative (D4SME).
Ultimately, cutting red tape where it matters most means looking beyond national rulebooks and focusing on the administrative reality faced by firms in their regions and municipalities. Subnational regulation is where many barriers to entry, investment and expansion become tangible.
Making these rules clearer, faster and better coordinated can help SMEs grow across territories, strengthen local economies and turn regulatory simplification into a practical lever for regional – and national – growth.
To learn more about the OECD’s work on related topics, see Boosting Business in Regions | OECD.
Marie Tirilly serves as a Policy Analyst at Business at OECD, where she contributes to the organization’s work across key policy areas including health, food and agriculture, SMEs, tourism, among others, while also supporting member relations and high‑level OECD processes. In parallel, she is also pursuing a PhD in international public law at Paris 1 Panthéon‑Sorbonne University, focusing on international organisations. Before joining the OECD, Marie practiced as a qualified lawyer at Clifford Chance and worked at the French Ministry of Foreign Affairs, for the Special Envoy of the French President to the United Nations Ocean Conference, collaborating with international partners on environmental issues. Marie is a graduate of the École Nationale d’Administration (ENA) and holds Double Master’s degrees in international law from Queen Mary University of London and Paris 1 Panthéon‑Sorbonne, both awarded with distinction.