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Firm Informality

Informal firms account for roughly one-third of production and one half to three-quarters of the non-agricultural labor force in developing countries and the informal sector is particularly important as a source of employment for the poor. However limited data and a focus on formal firms means relatively little is known about the productivity of these firms, the barriers they face for growth, and their spillover effects on the formal economy. This project therefore is conducting new surveys of informal firms, which can be used to study the dynamics of the informal sector, measure their interaction with the formal sector, and provide an empirical basis for modeling the aggregate growth effects.

The initial phase of the research concentrates on informality among microenterprise firms. Panel surveys in Mexico and Sri Lanka have collected detailed information on the constraints facing microenterprises, their degree of interaction with the formal sector, and their motives for choosing informal entrepreneurship. Few microenterprise owners view the regulatory aspect of informality as being an obstacle to the growth of their business, with the majority seeing themselves as too small to benefit from registration.

Attitudes towards formalization among unregistered firms 

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 Reasons given for not registering


 Sri Lanka

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Process of registration is too expensive
Process of registering takes too much time
The additional costs of operating as a regisered business are too high
My business is too small
I don't see the benefits of registering
I do not know how to register
No business like mine is registered
Registration isn't ncessary



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The second phase of this work will collect detailed information on informality across the firm size distribution, allowing us to answer the following types of questions:
  • Are small firms constrained more by regulations, access to credit, or entrepreneurial talent?
  • Is there really a missing middle in the size distribution of firms, or do our surveys just not measure the middle well?
  • Is the informal sector a breeding ground for formal sector entrepreneurs? How many medium and large firm owners got their start in the informal sector?


  • David McKenzie


WPS5402The effects of business environments on development : surveying new firm-level evidence Xu, Lixin Colin2010/08/01
WPS4934Innovative firms or innovative owners ? determinants of innovation in micro, small, and medium enterprises de Mel, Suresh; McKenzie, David; Woodruff, Christopher 2009/05/01
WPS4635Who are the microenterprise owners ? Evidence from Sri Lanka on Tokman v. de Soto de Mel, Suresh; McKenzie, David; Woodruff, Christopher 2008/05/01
WPS4449Does it pay firms to register for taxes ? the impact of formality on firm profitability McKenzie, David; Sakho, Yaye Seynabou2007/12/01

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