Publication: The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka
Loading...
Files in English
1,323 downloads
Date
2013-04
ISSN
1945-7782
Published
2013-04
Author(s)
Editor(s)
Abstract
A field experiment in Sri Lanka provides informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs does not increase registration. Payments equivalent to one-half to one month (alternatively, two months) of the median firm's profits leads to registration of around one-fifth (alternatively, one-half ) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms that grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state.
Link to Data Set
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Citations
- Cited 152 times in Scopus (view citations)
Collections
Related items
Showing items related by metadata.
Publication The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka(2012-03-01)The majority of firms in most developing countries are informal. The authors of this paper conducted a field experiment in Sri Lanka that provided incentives for informal firms to formalize. Offering only information about the registration process and reimbursement for direct registration costs had no impact on formalization. Adding payments equivalent to one-half to one month's profits for the median firm led to registration of around one-fifth of firms. A larger payment equivalent to two months' median profits induced half the firms to register. The main reasons for not formalizing when offered incentives included issues related to ownership of land and concerns about facing labor taxes in the future. The degree of bureaucracy in the registration process also seems to matter for those with the incentive to register, with response to the incentives higher in Colombo, where the registration process was easier, than in Kandy. Three follow-up surveys, at 15 to 31 months after the intervention, measure the impact of formalizing on these firms. Although mean profits increased, this appears largely due to the experiences of a few firms that grew rapidly, with most firms experiencing no increase in income as a result of formalizing. The authors also find little evidence for most of the channels through which formalization is hypothesized to benefit firms, although formalized firms do advertise more and are more likely to use receipt books. In qualitative interviews owners of formalized firms also feel their businesses have more legitimacy. Finally, formalizing is found to result in a large increase in trust in the state. Their focus is largely on the private costs and benefits of existing firms formalizing. Within their sample they cannot measure broader impacts of formalization on other firms (who may prosper from not having to compete against informal firms not paying taxes), nor impacts of easier formalization on entry of new firms. Nevertheless, our results suggest that although most informal firms do not want to formalize, given the current private costs and benefits of formalizing, policy efforts that lead to relatively modest increases in the net benefits of formalizing would induce a sizeable share of informal firms to formalize.Publication Do Informal Firms Want to Formalize and Does It Help Them If They Do?(World Bank, Washington, DC, 2012-03)Most firms in developing countries are informal. Does it make sense for them to formalize? Hernando de Soto has famously argued that informal firms would like to be formal, only that burden some entry barriers prevent them. The result, spurred by the efforts of doing business and investment climate reform efforts has been efforts around the world to streamline the entry process. However, a countervailing view of informality views informal firm owners as rationally weighing up the costs and benefits of formalizing, and rationally choosing only to become formal when they grow large enough to benefit from the formal institutions of society. In this view, smaller, less productive firms don't see any gain to formalizing, so choose not to.Publication Measuring Microenterprise Profits: Must We Ask How the Sausage Is Made?(2009)A large share of the World's poor is self-employed. Accurate measurement of profits from microenterprises is therefore critical for studying poverty and inequality, measuring the returns to education, and evaluating the success of microfinance programs. However, a myriad of problems plague the measurement of profits. This paper reports on a variety of different experiments conducted to better understand the importance of some of these problems, and to draw recommendations for collecting profit data. In particular, we (i) examine how far we can reconcile self-reported profits and reports of revenue minus expenses through more detailed questions; (ii) examine recall errors in sales, and report on the results of experiments which randomly allocated account books to firms; and (iii) asked firms how much firms like theirs underreport sales in surveys like ours, and had research assistants observe the firms at random times 15-16 times during a month to provide measures for comparison. We conclude that firms underreport revenues by about 30%, that account diaries have significant impacts on both revenues and expenses, but not on profits, and that simply asking profits provides a more accurate measure of firm profits than detailed questions on revenues and expenses.Publication Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto(World Bank, Washington, DC, 2008-05)Is the vast army of the self-employed in low income countries a source of employment generation? This paper uses data from surveys in Sri Lanka to compare the characteristics of own account workers (non-employers) with wage workers and with owners of larger firms. The authors use a rich set of measures of background, ability, and attitudes, including lottery experiments measuring risk attitudes. Consistent with the International Labor Organization's views of the self employed (represented by Tokman), the analysis finds that two-thirds to three-quarters of the own account workers have characteristics which are more like wage workers than larger firm owners. This suggests the majority of the own account workers are unlikely to become employers. Using a two and a half year panel of enterprises, the authors show that the minority of own account workers who are more like larger firm owners are more likely to expand by adding paid employees. The results suggest that finance is not the sole constraint to growth of microenterprises, and provides an explanation for the low rates of growth of enterprises supported by microlending.Publication Innovative Firms or Innovative Owners? Determinants of Innovation in Micro, Small, and Medium Enterprises(2009-05-01)Innovation is key to technology adoption and creation, and to explaining the vast differences in productivity across and within countries. Despite the central role of the entrepreneur in the innovation process, data limitations have restricted standard analysis of the determinants of innovation to consideration of the role of firm characteristics. The authors develop a model of innovation that incorporates the role of both owner and firm characteristics, and use this to determine how product, process, marketing, and organizational innovations should vary with firm size and competition. They then use a new, large, representative survey from Sri Lanka to test this model and to examine whether and how owner characteristics matter for innovation. The survey also allows analysis of the incidence of innovation in micro and small firms, which have traditionally been overlooked in the study of innovation, despite these firms comprising the majority of firms in developing countries. The analysis finds that more than one-quarter of the microenterprises are engaging in innovation, with marketing innovations the most common. As predicted by the model, firm size has a stronger positive effect, and competition a stronger negative effect, on process and organizational innovations than on product innovations. Owner ability, personality traits, and ethnicity have a significant and substantial impact on the likelihood of a firm innovating, confirming the importance of the entrepreneur in the innovation process.
Users also downloaded
Showing related downloaded files
Publication Doing Business 2014 : Understanding Regulations for Small and Medium-Size Enterprises(Washington, DC: World Bank Group, 2013-10-28)Eleventh in a series of annual reports comparing business regulation in 185 economies, Doing Business 2014 measures regulations affecting 11 areas of everyday business activity: Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting investors, Paying taxes, Trading across borders, Enforcing contracts, Closing a business, Employing workers. The report updates all indicators as of June 1, 2013, ranks economies on their overall “ease of doing business”, and analyzes reforms to business regulation – identifying which economies are strengthening their business environment the most. The Doing Business reports illustrate how reforms in business regulations are being used to analyze economic outcomes for domestic entrepreneurs and for the wider economy. Doing Business is a flagship product by the World Bank and IFC that garners worldwide attention on regulatory barriers to entrepreneurship. More than 60 economies use the Doing Business indicators to shape reform agendas and monitor improvements on the ground. In addition, the Doing Business data has generated over 870 articles in peer-reviewed academic journals since its inception.Publication Remarks to the Annual Meetings 2020 Development Committee(World Bank, Washington, DC, 2020-10-16)David Malpass, President of the World Bank Group, announced that the Board approved a fast track approach to emergency health support programs that now covers 111 countries. Most projects are well advanced, with average disbursement upward of 40 percent. The goal is to take broad, fast action early. The operational framework presented back in June has positioned the Bank to help countries address immediate health threats and social and economic impacts and maintain our focus on long-term development. The Bank is making good progress toward the 15-month target of 160 billion dollars in surge financing. Much of it is for the poorest countries and will take the form of grants or low-rate, long-maturity loans. IFC, through the Global Health Platform, will be providing financing to vaccine manufacturers to foster expanded production of COVID-19 vaccines in both part 1 and 2 countries, providing production is reserved for emerging markets. The Development Committee holds a unique place in the international architecture. It is the only global forum in which the Governments of developed countries and the Governments of developing countries, creditor countries and borrower countries, come together to discuss development and the ‘net transfer of resources to developing countries.’ The current International Financial Architecture system is skewed in favor of the rich and creditor countries. It is important that all voices are heard, so Malpass urged the Ministers of developing countries to use their voice and speak their minds today. Malpass urged consideration of how we can build a new approach to debt restructuring that allows for a fair relationship and balance between creditors and debtors. This will be critical in restoring growth in developing countries; and helping reverse the inequality.Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication World Development Report 2011(World Bank, 2011)The 2011 World development report looks across disciplines and experiences drawn from around the world to offer some ideas and practical recommendations on how to move beyond conflict and fragility and secure development. The key messages are important for all countries-low, middle, and high income-as well as for regional and global institutions: first, institutional legitimacy is the key to stability. When state institutions do not adequately protect citizens, guard against corruption, or provide access to justice; when markets do not provide job opportunities; or when communities have lost social cohesion-the likelihood of violent conflict increases. Second, investing in citizen security, justice, and jobs is essential to reducing violence. But there are major structural gaps in our collective capabilities to support these areas. Third, confronting this challenge effectively means that institutions need to change. International agencies and partners from other countries must adapt procedures so they can respond with agility and speed, a longer-term perspective, and greater staying power. Fourth, need to adopt a layered approach. Some problems can be addressed at the country level, but others need to be addressed at a regional level, such as developing markets that integrate insecure areas and pooling resources for building capacity Fifth, in adopting these approaches, need to be aware that the global landscape is changing. Regional institutions and middle income countries are playing a larger role. This means should pay more attention to south-south and south-north exchanges, and to the recent transition experiences of middle income countries.