Impact Assessment

Entry Regulation and Formalisation of Microenterprises in Developing Countries, by Miriam Bruhn and David McKenzie, The World Bank, June 2013

    Description
    The majority of microenterprises in most developing countries remain informal despite more than a decade of reforms aimed at making it easier and cheaper for them to formalize. This paper summarizes the evidence on the effects of entry reforms and related policy actions to promote firm formalization.

    Summary of results
    The effect of business entry reforms on number of firm registrations:
    Four studies have examined the impact of business entry reforms on firm registration in different Latin American countries, exploiting cross-time and cross-municipality variation in the implementation of these reforms. A common element in these reforms is that they opened one-stop shop service points and thus eliminated the need to visit several different government offices for completing the registration process, lowering the time and/or cost needed to register a business. Most of these studies find that a large reduction in the cost and time taken to register a firm leads to a modest increase in the number of formal firms. However, entry reforms appear to have less of an effect on business registrations in less populous and more remote areas. The majority of these studies cannot disentangle whether the increase in registrations is due to informal firms registering or new firms being created by individuals who did not run a business before.

    Does making it easier to register a firm cause formalization of existing informal firms?
    Two studies include evidence on this question. These find only temporary and/or small-scale effects on the the registration of previously informal firms.

    The effect of providing information about how to register, or lowering the cost of formalizing, on formalization rate:
    Two randomized experiments examine the effects of providing information to firms about how to register, and about the possible benefits of formalizing. However, they have found zero resulting increase in formalization.

    Three further studies find little effect of a reduction of the cost to register on the formalisation of firms. The effect is slightly higher for obtaining a municipal license only.

    One randomized experiment of hows that more enforcement by inspectors can induce some informal firms to become formal (25% of the sample).