How Should the Government Bring Small Firms into the Formal System? Experimental Evidence from Malawi

53 Pages Posted: 5 Oct 2018 Last revised: 6 Oct 2018

See all articles by Francisco Campos

Francisco Campos

World Bank

Markus Goldstein

World Bank

David J. McKenzie

World Bank - Development Research Group (DECRG); IZA Institute of Labor Economics

Date Written: October 4, 2018

Abstract

Developing country governments seek to reduce the pervasive informality of firms for multiple reasons: increasing the tax base, helping firms access formal markets and grow, increasing the rule of law, and as a means to obtain data that can be used for other government functions. However, there is debate as to the best approach for achieving these goals. This study conducted a randomized experiment in Malawi to test three alternatives: (a) assisting firms to obtain a business registration certificate that offers access to formal markets but imposes no tax obligations; (b) assisting firms to obtain business registration and tax registration; and (c) supplementing the assistance to obtain business registration with a bank information session intended to help firms utilize one of the key potential benefits of formalizing. The study finds incredibly high demand for obtaining a formal status that is separate from tax obligations, and very low take-up of tax registration. Business registration alone has no impact on access to formal markets or firm performance. However, coupling registration assistance with the bank information session increases the use of formal financial services, and results in increases in firm sales by 20 percent and profits by 15 percent. The results highlight the advantages of separating business and tax registration, but also the need to assist firms in benefiting from their new formal status.

Keywords: Business in Development, Gender and Development, Judicial System Reform, Access to Finance, Transport Services

Suggested Citation

Campos, Francisco and Goldstein, Markus P. and McKenzie, David John, How Should the Government Bring Small Firms into the Formal System? Experimental Evidence from Malawi (October 4, 2018). World Bank Policy Research Working Paper No. 8601, Available at SSRN: https://ssrn.com/abstract=3260918

Francisco Campos (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Markus P. Goldstein

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

David John McKenzie

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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