Evaluating the Implications of Starting-Up Unregistered on Future Firm Performance: Evidence a 2019 Survey in Albania

Abstract

<jats:p> This paper evaluates critically the relationship between starting-up unregistered and firm performance. The widespread belief across all the dominant theories of informal entrepreneurship is that unregistered start-ups experience poorer future firm performance than those registered from the outset of their operations. To evaluate this poorer performance thesis, this paper reports World Bank Enterprise Survey (WBES) data on 377 enterprises in Albania collected in 2019. After controlling for other determinants of firm performance, the finding is that formal enterprises that started-up unregistered have significantly higher annual sales growth than enterprises that registered from the outset. To explain this, the argument is that in weak institutional environments, such as Albania, the advantages of operating unregistered at the outset outweigh the benefits of registration. The result is a call to re-theorize firm performance in the informal sector and for policy to shift toward a more facilitating approach that enhances benefits of registration. </jats:p>

The Impact of Formalization Program on Informal Household Enterprises Performance: Evidence From a Quasi-experiment in Nigeria

“…Economic growth, job creation, production efficiency, working conditions, and social protection were all seen as positive consequences in the formalization literature (ILO, 2015;Tijdens et al, 2015;Gatti et al, 2014;Fajnzylber et al, 2011;Berkel & Tarp, 2022). Contrary to these findings, a number of studies have documented negative association between formalization and firm performance (Rand & Torm, 2012;De Mel et al, 2013;Boly, 2018;Rocha et al, 2018;Campos et al, 2018;Benhassine et al, 2018;McCaig & Nanowski, 2019).The decision of an informal business to register is influenced by factors such as the quality of the institutions they deal with (Loayza et al, 2005;Williams & Kosta, 2020), the costs and benefits of registering (Diaz et al, 2018;De Mel et al, 2013), a lack of managerial skills (Mukorera, 2019), patriarchal norms (Thapa Karki et al, 2021), and human capital (Do and Vu, 2021).…”

“…Many microenterprises in developing countries do not have business registration licenses to operate and do not have a tax code with the government, despite efforts by the government to encourage firm formalization Andrade et al, 2014). As a result, studies have investigated how formalization policies and interventions influence employment creation (Betcherman et al, 2010;Grimm and Paffhausen, 2015;Betcherman, 2015), institutions (Williams & Kosta, 2020), and new business entrants (Bruhn, 2011). Few prior researches have used quasi-experimental methodologies and administrative data to examine how the formalization of businesses affects firm performance.…”

Informal Entrepreneurship: An Integrative Review and Future Research Agenda

“…For example, reactive formalizing leads to greater performance advantages in medium and large enterprises than in micro and small enterprises (Demenet et al, 2016). Moreover, reactive formalizing, after operating informally for a period of time, leads to greater performance advantages than registering the entrepreneurial activities from the outset (Williams et al, 2017; Williams & Kosta, 2020). Finally, according to the way performance is operationalized, performance results may differ.…”