Links between firm registration and performance: Does it pay to register?

The informal sector is an important part of Kenya’s economy and contributes significantly to employment creation, production and poverty reduction. The Micro, Small and Medium Enterprises (MSME) sector has especially been singled out and prioritized as an important driver of growth, yet close to 80% of MSME in Kenya are informal. The question that arises is whether firm registration limits firm performance. Using data from the 2016 Kenya Micro, Small and Medium Enterprises (MSME) survey, we estimate the effect of firm registration on firm performance. We control for self-selection into registration using instrumental variable and coarsened exact matching (CEM) methods. We find that firm registration is associated with between 45% and 51% increase in firm income. For micro firms, registration raises firm income by between 49% and 65%. These findings indicate that formal firms are more productive than informal firms. This holds true even for micro firms. When firms operate informally, they limit their potential performance. Policies that promote and facilitate firm registration can go a long way in increasing productivity of MSME with positive implications for employment creation, production and poverty reduction.