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firm registration

Out of the shadows? Are firms more likely to formalize through tax simplification programs?

Caio Piza's picture
Red tape can be a significant barrier to having informal firms formalize and eventually benefit from any business support programs provided by governmental agencies. While the relationship between this formalization, access to finance and a firm’s performance has been implied by anecdotal evidence (de Soto 1989 and 2000), a recent survey of empirical evidence suggests that such programs may in fact achieve the opposite and not necessarily nudge firms to formalize. In fact, the evidence suggests that even with a significant reduction in red tape most informal firms decide to remain informal (see Bruhn and McKenzie 2013 for a survey).

Business Environment Reforms: Distinguishing Tokenism from the Real Thing

Inessa Love's picture

To promote the registration of new firms, many countries have been undertaking reforms to reduce the costs, days or procedures required to register a business. For example, the World Bank Doing Business report each year identifies the 10 most improved countries on the overall Doing Business index (comprised of 9 subindicators). One of these subindicators measures reforms related to starting a business, with 30-65 countries reforming in this area each year. A still unanswered question is whether some reforms are more important than others. A priori, it is not clear what magnitude of reduction in costs (or days or procedures) is necessary to create a significant impact on firm registration. In other words, what exactly constitutes a reform? Is a 20% reduction in the costs of registration sufficient, or is a 50% reduction necessary to get a substantial number of firms to register?

In a recent paper Leora Klapper and I empirically investigate the magnitude of reform required for a significant impact on the number of new registrations. We use a new dataset that is uniquely suited for this purpose: the World Bank Group Entrepreneurship Snapshots (WBGES), a cross-country, time-series panel dataset on the number of newly registered companies. We supplement it with data from Doing Business reports that contain the cost, time and procedures required for registration of new companies. Importantly, both datasets focus on limited liability companies. In an earlier paper, we used the same dataset to investigate the impact of the global financial crisis on new firm registrations