Evaluating the Impacts of Starting Up Unregistered on Firm Performance in Africa

Abstract

The aim of this paper is to contribute to an understanding of the entrepreneurship process in Africa by evaluating the link between starting up unregistered and future firm performance. The widespread assumption has been that firms starting up unregistered in the informal economy suffer from poor performance compared to those starting up registered and in the formal economy. To test this poorer performance thesis, World Bank Enterprise Survey (WBES) data is evaluated from across 41 African countries covering the period from 2006 to 2013. Controlling for a comprehensive set of other determinants of firm performance, the finding is that formal enterprises with five or more employees that started up unregistered have significantly higher annual sales, employment and productivity growth rates compared with those firms that registered their operations at startup. The paper concludes by discussing the theoretical and policy implications of this finding.

Willingness to Formalize: A Case Study of the Informal Micro and Small-Scale Enterprises in Zimbabwe

“…However, Kappel and Ishengoma (2006) identify the high cost of formalization and the lack of institutional incentives for operating in the formal sector as the main barriers to entry into the formal sector. Williams and Kedir (2017) support this view and explain that because of limited resources, new firms may choose to focus their resources on creating a stronger foundation for their business by investing in building relationships with suppliers or establishing stronger routines, over paying for registration. Empirical studies by Devas and Kelly (2001) and Sander (2003) supported this argument because they found that a reduction in registration cost led to an increase in business registration in Kenya and Uganda, respectively.…”

“…In recent years, governments have changed focus and now acknowledge the possible contributions of the informal sector to the economy through taxation and employment creation. There is now more drive by governments to encourage formalization of the enterprises as a way to deal with the informal sector (Williams and Kedir, 2017). Across the world there has been increasing recognition of the informal sector as a key driver of the national economy and that has moved the policy approach from completely eradicating the informal sector to policies that addresses institutional imperfections and institutional asymmetry and encourage formalization instead (Williams and Kedir, 2017;Deakins and Freel, 2009).…”

“…In addition to the direct benefits of increased income to the economy through taxation, switching from informal to formal can also enhance a firm's profits. Evidence from Williams and Kedir (2017) show that firms that commence unregistered and then register tend to outperform those registered from the onset. The same was found in a study from Vietnam (Boly, 2018) that formalization leads to increase in firms' profits and value added.…”

“…This could be hindering or discouraging registration of enterprises. Literature groups the barriers to formalization into two groups, namely institutional imperfections associated with rent seeking and institutional asymmetry (Williams and Kedir, 2017;Williams and Shahid, 2016;Williams and Horodnic, 2016).…”

“…Alternatively, targeting factors that alter individual morality regarding operating unregistered can also improve formalization. Williams and Kedir (2017) suggested that advertising campaigns on benefits of registration as well improving service delivery could contribute toward changing people's norms and values toward formalization.…”