To Formalize, or Not to Formalize, That is The Question

Publication Details

Author
Markus Goldstein, David McKenzie, Francisco Campos
Institutional affiliations
None specified
Grant-holding institution
None specified
Country
Malawi
Region
Sub-Saharan Africa (includes East and West Africa)
Sector
Finance, Private Sector Development
Subsector
Business Environment, Small Scale Enterprise
Gender analysis
 
Subsector
Business Environment, Small Scale Enterprise
Gender analysis
 
Equity Focus
None specified
Evaluation design
Randomised Control Trials (RCT)
Status
Ongoing 3ie Funded Studies
3ie Funding Window
Open Window Round 4

Context

Estimates from the Fin-Scope Malawi SMME Survey (2012) suggest that 97% of businesses in the country are not registered as formal businesses. Unfortunately, there is very little information about informal enterprises since they are typically not covered or adequately represented in firm-level enterprise surveys. There is also much to learn about the relationship between formality and performance, in particular if certain types of entrepreneurs - such as female entrepreneurs - are better placed to gain than others.

Malawi's government is interested in evaluating whether or not formality improves enterprise performance and, at the same time, exploring potential reasons for high informality. If registration does have a positive impact, that information can be used to raise awareness among firms and incentivize registration. If, however, the estimated costs of becoming formal outweigh the estimated benefits or if some of the hypothesized benefits do not materialize, then the government may want to address other constraints to enterprise performance. This research project applies a randomized controlled trial in order to estimate the impact of business registration for small-to-medium enterprises in Malawi. It will also assess the complementary value of increasing access to financial services for these entrepreneurs as a means of separating enterprise from household responsibilities.

This impact evaluation will allow for estimating the impact of both treatments and to better understand the nature of small and medium enterprises in the informal sector of developing countries. It will also assess the importance of informality as a constraint to business formation and expansion, access to finance, and overall productivity. In a period of growing investment climate reforms, the results of this study will be of interest to a range of policy makers in developing countries.

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