The Institute of Social Studies is Europe's longest-established centre of higher education and research in development studies. On 1 July 2009, it became a University Institute of the Erasmus University Rotterdam (EUR). Postgraduate teaching programmes range from six-week diploma courses to the PhD programme. Research at ISS is fundamental in the sense of laying a scientific basis for the formulation of appropriate development policies. The academic work of ISS is disseminated in the form of books, journal articles, teaching texts, monographs and working papers. The Working Paper series provides a forum for work in progress which seeks to elicit comments and generate discussion. The series includes academic research by staff, PhD participants and visiting fellows, and award-winning research papers by graduate students.
This paper provides a meta-analysis of the impact of business formalization on performance. We exploit a meta-dataset of 1,271 estimates derived from 20 studies available until October 2019. The analysis reveals that formalization is associated with fairly small benefits that take time to materialize. We then exploited the difference between policy-induced formalization and self-induced formalization investigating underlying effects, publication bias, and sources of heterogeneity. Policy-induced formalization brings large benefits, whereas self-induced formalization only results in medium benefits, suggesting that indeed formalization can be spurred by adequate policy actions. To be most effective, formalization policies should be implemented with information sessions, trainings/workshops, and business development services to unleash the growth potential of newly formalized firms in the most potent way.
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Under what circumstances does firm formalization yield net benefits for previously informal firms? We systematically assessed 22 primary studies in a meta-analysis of African, Asian and Latin American firms. The studies are published between 2011 and 2021 and provide 1,372 performance and business practice estimates: 40 percent of the estimates show significantly positive and 54 percent insignificant effects. The FAT-PET analysis suggests a small positive effect of formalization on firm performance. We also employ a multivariate analysis: The overall genuine effect is modest. There is a positive role for information and time for effects to materialize. Notably, more rigorous designs and recent studies tend to identify smaller and more dispersed effects. The modest effects cast doubt about the capacity of formalization policies to improve business performances suggesting that policies might better focus on prioritizing business productivity and managerial capability over formalization. Yet, we need further experimenting and fine-tuning of policy approaches to precisely identify what could make the candle of formalization worth the effort. The current evidence supports theories arguing that the rational cost-benefit argument is an overly simplistic representation of the decision to formalize and that formalization is an uncertain decision affected by multiple and interrelated aspects.
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