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What are the benefits to firms from formalization?

Mohammad Amin's picture

The Enterprise Surveys recently launched an ambitious project to survey informal firms around the globe. Results from three surveys conducted in Ivory Coast, Madagascar and Mauritius are now available. Informal firms surveyed were asked if getting registered would help them or not through better access to finance, raw materials, less bribes, etc. This is an important question given that so much talk on bringing the informal sector within the fold of the formal sector hinges on the supposed benefits of formality but with little hard data to support it. Are these benefits real and how big are they?

The table below shows the percentage of firms that believe that a becoming registered would bring better access to finance, etc. Overall, a substantial number of firms believe that registration provides real benefits - confirming the general perception on this issue. An overwhelming 85.1% of the firms perceive better access to finance and 68% better access to markets from registration. Across countries, benefits are less pronounced in Mauritius relative to the other two countries but still substantial.

Benefits

Firms were also asked which among the listed benefits is most important to them. The figure below shows the distribution for the full sample. Better access to finance clearly stands out with over 56% of the firms identifying it as the most important benefit followed by 13.4% for access to markets and 7.8% for access to raw materials.

Most important

The findings suggest real benefits to firms from registering. This raises two important issues: First, how big are these gains? Second, why don’t firms register then? The latter question will be discussed in a future post on the PSD blog. The answer to the first question is more difficult and requires a more detailed analysis. A natural starting point is to compare formal and informal firms in terms of their performance (sales growth, investment, etc.) using data from Enterprise Surveys on firms in the same city and industry. This remains a promising yet neglected area for future research.

Comments

I disagree in part. The data seem to only indicate there exists a perception by informal companies that formalising will improve access to capital. This would make the first question to ask, 'Is access to financing actually improved by registering?' If not improved, then you have an answer to your second question, why firms do not formalise.

Submitted by Mohammad Amin on
In response to the comment on my blog: firms' decision to register or not will be based on their expected or "perceived" net benefit (from registering). It does not matter (for firms' decision) whether the perceived benefits are real or not. I do agree with the remaining part of the comment that perceived benefits and real benefits may diverge. Reading my blog again, I believe that I have maintained that distinction by repeatedly noting that these are the benefits that firms "perceive" and that these "suggest" real benefits. I do believe that the suggestion/hint of real benefits is there - to be ascertained (or rejected) using hard data.

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