Product Market Regulation Index

What Is the Regulatory Burden Indicator?

The regulatory burden indicator — often operationalised as a product market regulation (PMR) index — quantifies the extent to which government rules and administrative procedures affect the ease of starting, operating, and expanding a business. It encompasses barriers to entrepreneurship, restrictions on domestic and foreign competition, the complexity of licensing and permit requirements, and the degree of state involvement in commercial activity. A high regulatory burden implies that firms face significant procedural hurdles, compliance costs, and entry barriers; a low burden implies a more open and contestable market environment.

Regulation is a necessary feature of any modern economy. Rules that protect public health, ensure product safety, preserve the environment, and maintain financial stability serve essential social objectives. The regulatory burden indicator is not a blanket argument against regulation; rather, it asks whether the cumulative weight of rules — some individually reasonable, others outdated or poorly designed — is imposing costs that outweigh their benefits and impeding the dynamism and productivity growth that drive prosperity.

The most widely referenced source for cross-country regulatory-burden comparisons is the OECD's Product Market Regulation indicators, which score economies on a quantitative scale based on detailed questionnaires about laws and regulations on the books. The World Bank's now-discontinued Doing Business project provided another influential set of metrics focused on the practical steps required to complete common business transactions such as registering a firm, obtaining a construction permit, or enforcing a contract. Although the Doing Business project was retired, its underlying approach has informed successor initiatives that continue to benchmark the business environment.

Understanding the regulatory environment is important for anyone analysing an economy's productivity performance, investment climate, or competitive position. Regulation shapes the incentive structure that firms face, influencing decisions about entry, exit, innovation, and investment. Over time, the cumulative effect of regulatory choices becomes embedded in the structure of the economy, making reform both consequential and politically difficult.

The relationship between regulation and economic performance is not linear. Too little regulation can lead to market failures, environmental degradation, and financial instability; too much can stifle competition, raise costs, and deter innovation. The challenge for policymakers is to find the balance that maximises the net benefits of regulation — a task that requires continuous evaluation and willingness to reform rules that have outlived their purpose.

How It Is Calculated

The OECD PMR index is constructed from a detailed bottom-up scoring of regulatory provisions across multiple domains. The framework is hierarchical, aggregating sub-indicators into progressively broader categories.

At the most granular level, individual regulatory provisions — such as whether a licence is required to operate in a particular sector, or whether price controls apply to specific goods — are scored on a cardinal scale, typically from 0 (least restrictive) to 6 (most restrictive). These scores are then aggregated using equal weights through several layers:

$\text{PMR}_i = \sum_{j} w_j \cdot S_{ij}$

where $S_{ij}$ is country $i$'s score on sub-indicator $j$ and $w_j$ is the weight assigned to that sub-indicator. The top-level index summarises the overall stance of product market regulation, while the sub-components provide diagnostic detail on specific areas such as barriers to entry, public ownership, and administrative burdens on start-ups.

Key Dimensions

The PMR framework evaluates regulation along three broad dimensions. State control measures the extent of public ownership, government involvement in business operations, and the use of price controls or command-and-control regulation. Barriers to entrepreneurship captures the administrative costs of starting a business, regulatory protection of incumbents, and barriers in network sectors such as energy, transport, and telecommunications. Barriers to trade and investment assesses tariff and non-tariff barriers, restrictions on foreign direct investment, and discriminatory treatment of foreign firms.

Each dimension contributes independently to the overall regulatory climate, and the sub-scores can move in different directions. A country may be liberalising its trade and investment regime while simultaneously increasing regulatory complexity in domestic markets, resulting in a stable aggregate score that masks important underlying dynamics.

Complementary Measures

Beyond the PMR index, analysts draw on additional sources. The World Economic Forum's Global Competitiveness Report includes pillars related to institutional quality and regulatory efficiency. The Fraser Institute's Economic Freedom of the World index covers regulation of credit, labour, and business. Each source has its own methodology, scope, and limitations, but the broad rankings tend to be correlated: economies that score well on one index generally score well on others.

De Jure vs. De Facto Regulation

Regulatory-burden indicators primarily measure the rules on the books — the de jure regulatory environment — not necessarily the rules as enforced. In some jurisdictions, formal regulations are strict but enforcement is lax; in others, informal norms and bureaucratic discretion impose costs that no statutory index can capture. This gap between de jure and de facto regulation is a persistent limitation of all quantitative indices.

Furthermore, the indices treat regulation as a cost to business, when in reality some regulations enhance efficiency — for example, by establishing clear property rights, providing a level competitive playing field, or reducing information asymmetries. A low score is not automatically "good" and a high score is not automatically "bad"; the appropriate level of regulation depends on the social objectives being pursued and the effectiveness of the regulatory design.

How to Read the Numbers

The OECD PMR index ranges from 0 to 6. Most advanced economies cluster in a relatively narrow band, but the differences within that band are economically meaningful.

Trends over time are at least as important as the level. An economy that is steadily reducing its PMR score is signalling a commitment to structural reform and market opening. One whose score is rising, or has remained stubbornly high despite reform rhetoric, may be accumulating regulatory drag that will weigh on productivity and competitiveness.

The sub-component scores often tell a richer story than the aggregate. A country may have a moderate overall PMR but extremely high barriers in a specific network sector — telecommunications or energy, for example — that drags down performance in downstream industries. Identifying these bottlenecks is the starting point for targeted reform. Conversely, a high aggregate score may obscure the fact that the country has already reformed the most growth-critical areas while retaining regulation in domains where it serves important social purposes.

Economic Significance

The regulatory environment affects economic outcomes through several channels. The most direct is the cost of compliance. Firms that must navigate complex licensing requirements, submit extensive documentation, or wait months for permits incur expenses that divert resources from productive activity. These costs fall disproportionately on small firms and new entrants, which lack the legal and administrative staff that large incumbents maintain. The result is a tilting of the competitive playing field that favours established firms and discourages the entrepreneurial entry that is a key driver of innovation and productivity growth.

Beyond direct costs, regulation shapes competitive dynamics. Rules that protect incumbents — through exclusive licences, grandfathering provisions, or onerous entry requirements — reduce the threat of new competition and weaken the incentive to innovate. Conversely, regulatory frameworks that promote competition and lower entry barriers tend to foster greater business dynamism, faster reallocation of resources toward more productive firms, and stronger multifactor productivity growth.

Foreign direct investment is sensitive to the regulatory climate. Multinational firms weigh regulatory complexity alongside tax rates, infrastructure quality, and market size when choosing where to locate operations. Economies with burdensome regulation may find themselves at a disadvantage in attracting the capital, technology, and managerial know-how that FDI brings. Empirical studies have found a significant negative correlation between PMR scores and FDI inflows, controlling for other determinants.

Labour-market outcomes are also at stake. Regulations that impede firm entry and growth indirectly reduce job creation, while rules that slow the exit of unproductive firms can trap workers in low-productivity employment. Structural reforms that ease the regulatory burden have been associated, in cross-country studies, with lower unemployment, faster job creation, and higher labour productivity over the medium term.

For policymakers, regulatory reform is one of the most powerful tools available for raising long-run growth without any direct fiscal cost. However, reform is politically difficult because the beneficiaries — potential entrants, consumers, future workers — are diffuse and often unorganised, while the losers — protected incumbents and their employees — are concentrated and vocal. Sustained political commitment and transparent evaluation frameworks are essential for overcoming this asymmetry. Independent regulatory-review bodies, sunset clauses that require periodic re-justification of existing rules, and systematic cost-benefit analysis of new regulations all contribute to a healthier regulatory environment.

Related Indicators

• Business Dynamism — firm entry and exit rates that regulation directly influences
• FDI Inflows (% of GDP) — foreign investment that responds to the regulatory climate
• Business Confidence — sentiment shaped partly by the perceived regulatory environment
• Labour Productivity Growth — the productivity gains that a well-designed regulatory framework supports