Cross-Border Startups and Regulatory Arbitrage: Navigating Legal Complexity in the Global Entrepreneurial Ecosystem

regulatory arbitrage; cross-border entrepreneurship; regulatory entrepreneurship; international new ventures; corporate structuring; extraterritoriality; compliance cost; institutional entrepreneurship

The expression "regulatory arbitrage" is commonly used to refer to cross-border startups, but it can refer to three different approaches that have three distinct mechanisms, legal risks, and normative status. In this paper, arbitrage (which involves the transfer of the activity away from the rule's jurisdiction), structural layering (which involves the separation of legal situs from economic situs, but does not involve the relocation of the activity), and regulatory entrepreneurship (which involves operating in legal ambivalence and engaging in activism that attempts to alter the rule rather than to avoid it) are distinguished. Two variables of the structure of the regulated activity, its mobility, and the reach of the rule, are shown to determine which strategy is available, and the arbitrage feasibility space is developed accordingly. The main thesis of the paper is that this area is shrinking. It is being closed by four forces: the large market influence of regulation, international tax coordination, automatic information exchange, and moving from entity-based to activity-based and data-based regulatory design. Meanwhile, the law becomes more intricate. As a result, the complexity paradox is that the compliance costs of operating across jurisdictions rise as the arbitrage benefits decrease; that is, complexity becomes more of a fixed cost, and fixed costs are regressive in firm size. We introduce the concept of ‘jurisdictional debt’ to describe the arrangements that are established at an early stage for reasons of capital access, with the cost of unwinding those arrangements piling up and materializing at a later stage, and we theorize about a legitimacy triage between arbitrage that takes advantage of the real competition among policies and arbitrage that takes advantage of an enforcement gap or externalizes harm. There are seven propositions and an analytical protocol provided, but no invented statistics are reported.