What is meant by saying that regulation is likely to affect incentives?
The basic point of this sentence is that when the government interferes in the private sector with more regulations, businesses get hurt as there are more hurdles to overcome or unintended negative consequences. When this happens, these companies do not have incentives to keep expanding. More seriously, companies may even lose incentives to be in America and they may leave where there are less regulations.
For example, if there are more and more banking regulations put on the banks, then large banks may seek to leave to a place where there are more incentives to grow. This is the debate right now. Jamie Dimon and other CEO are saying that the Federal government should not put any more restrictions on their banks. This is debatable, of course.
Banks are not the only ones; tourism agencies are saying the same thing. With stricter visa laws, they say that some 600 billion dollars have been lost in the last decade, due to new federal regulations. One statistic they mention is that more Chinese now visit France rather than the the United States.