IDEAS home Printed from https://ideas.repec.org/a/eee/wdevel/v40y2012i5p983-998.html
   My bibliography  Save this article

The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs

Author

Listed:
  • Rand, John
  • Torm, Nina

Abstract

Based on unique panel data consisting of both formal and informal firms, this paper uses a matched double difference approach to examine the relationship between legal status and firm level outcomes in micro, small and medium manufacturing enterprises (SMEs) in Vietnam. Controlling for determining factors and observable time-variant factors that may simultaneously influence the decision to formalize and subsequent firm performance, we find evidence that becoming officially registered leads to an increase in profits and investments, and a decrease in the use of casual labor (improved contract conditions for workers). Thus, we conclude that formalizing is beneficial both to firms and the workers in these firms.

Suggested Citation

  • Rand, John & Torm, Nina, 2012. "The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs," World Development, Elsevier, vol. 40(5), pages 983-998.
  • Handle: RePEc:eee:wdevel:v:40:y:2012:i:5:p:983-998
    DOI: 10.1016/j.worlddev.2011.09.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0305750X11002269
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. James R. Tybout, 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 11-44, March.
    2. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships and Informal Credit in Vietnam," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1285-1320.
    3. Pradhan, Menno & van Soest, Arthur, 1995. "Formal and informal sector employment in urban areas of Bolivia," Labour Economics, Elsevier, vol. 2(3), pages 275-297, September.
    4. de Mel, Suresh & McKenzie, David J. & Woodruff, Christopher, 2009. "Measuring microenterprise profits: Must we ask how the sausage is made?," Journal of Development Economics, Elsevier, vol. 88(1), pages 19-31, January.
    5. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2011. "Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program," Journal of Development Economics, Elsevier, vol. 94(2), pages 262-276, March.
    6. Gong, Xiaodong & van Soest, Arthur, 2002. "Wage differentials and mobility in the urban labour market: a panel data analysis for Mexico," Labour Economics, Elsevier, vol. 9(4), pages 513-529, September.
    7. John Rand, 2007. "‘Credit Constraints and Determinants of the Cost of Capital in Vietnamese Manufacturing’," Small Business Economics, Springer, vol. 29(1), pages 1-13, June.
    8. David McKenzie & Christopher Woodruff, 2008. "Experimental Evidence on Returns to Capital and Access to Finance in Mexico," World Bank Economic Review, World Bank Group, vol. 22(3), pages 457-482, November.
    9. David Kaplan & Eduardo Piedra & Enrique Seira, 2006. "Are Burdensome Registration Procedures an Important Barrier on Firm Creation? Evidence from Mexico," Discussion Papers 06-013, Stanford Institute for Economic Policy Research.
    10. Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
    11. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
    12. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
    13. Alberto Abadie & David Drukker & Jane Leber Herr & Guido W. Imbens, 2004. "Implementing matching estimators for average treatment effects in Stata," Stata Journal, StataCorp LP, vol. 4(3), pages 290-311, September.
    14. repec:hrv:faseco:33078210 is not listed on IDEAS
    15. McKenzie, David & Seynabou Sakho, Yaye, 2010. "Does it pay firms to register for taxes? The impact of formality on firm profitability," Journal of Development Economics, Elsevier, vol. 91(1), pages 15-24, January.
    16. Dabla-Norris, Era & Gradstein, Mark & Inchauste, Gabriela, 2008. "What causes firms to hide output? The determinants of informality," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 1-27, February.
    17. Era Dabla-Norris & Andrew Feltenstein, 2005. "The underground economy and its macroeconomic consequences," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 8(2), pages 153-174.
    18. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
    19. Ulyssea, Gabriel, 2010. "Regulation of entry, labor market institutions and the informal sector," Journal of Development Economics, Elsevier, vol. 91(1), pages 87-99, January.
    20. Nguyen, Binh T. & Albrecht, James W. & Vroman, Susan B. & Westbrook, M. Daniel, 2007. "A quantile regression decomposition of urban-rural inequality in Vietnam," Journal of Development Economics, Elsevier, vol. 83(2), pages 466-490, July.
    21. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector, Second Version," PIER Working Paper Archive 07-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 17 Oct 2007.
    22. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
    23. Anna Folke Larsen & John Rand & Nina Torm, 2011. "Do Recruitment Ties Affect Wages? An Analysis using Matched Employer–Employee Data from Vietnam," Review of Development Economics, Wiley Blackwell, vol. 15(3), pages 541-555, August.
    24. Quy-Toan Do & Lakshmi Iyer, 2008. "Land Titling and Rural Transition in Vietnam," Economic Development and Cultural Change, University of Chicago Press, vol. 56, pages 531-579.
    25. Pablo Fajnzylber & William F. Maloney & Gabriel V. Montes-Rojas, 2009. "Releasing Constraints to Growth or Pushing on a String? Policies and Performance of Mexican Micro-Firms," Journal of Development Studies, Taylor & Francis Journals, vol. 45(7), pages 1027-1047, August.
    26. Rand, John & Tarp, Finn & Cuong, Tran Tien & Tam, Nguyen Thanh, 2008. "SME Fringe Benefits Provision," MPRA Paper 29469, University Library of Munich, Germany.
    27. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    28. Rachel Croson & Uri Gneezy, 2009. "Gender Differences in Preferences," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 448-474, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Huu Chi Nguyen & Christophe J. Nordman & François Roubaud, 2013. "Who Suffers the Penalty?: A Panel Data Analysis of Earnings Gaps in Vietnam," Journal of Development Studies, Taylor & Francis Journals, vol. 49(12), pages 1694-1710, December.
    2. Tanaka, Kiyoyasu & Hashiguchi, Yoshihiro, 2015. "Agglomeration effects of informal sector: evidence from Cambodia," IDE Discussion Papers 495, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    3. Anuradha Joshi & Wilson Prichard & Christopher Heady, 2014. "Taxing the Informal Economy: The Current State of Knowledge and Agendas for Future Research," Journal of Development Studies, Taylor & Francis Journals, vol. 50(10), pages 1325-1347, November.
    4. Jean-Pierre Cling & Mireille Razafindrakoto & François Roubaud, 2012. "Explanatory factors behind formalizing non-farm household businesses in Vietnam," Working Papers DT/2012/20, DIAL (Développement, Institutions et Mondialisation).
    5. Brian McCaig, Jordan Nanowski, 2018. "Business Formalization in Vietnam," LCERPA Working Papers 0113, Laurier Centre for Economic Research and Policy Analysis, revised 01 Feb 2018.
    6. J.J. Voeten & W.A. Naudé, 2014. "Regulating the negative externalities of enterprise cluster innovations: lessons from Vietnam," Innovation and Development, Taylor & Francis Journals, vol. 4(2), pages 203-219, October.
    7. Nguyen Thi Lan Huong & Luu Quan Tuan & Meissner, Matthias & Bui Sy Tuan & Dang Do Quyen & Nguyen Hai Yen, 2013. "Social Protection for the Informal Sector and the Informally Employed in Vietnam: Literature and data review," IEE Working Papers 199, Institut fuer Entwicklungsforschung und Entwicklungspolitik, Ruhr-Universitaet Bochum.
    8. Amadou Boly, 2015. "On the benefits of formalization: Panel evidence from Vietnam," WIDER Working Paper Series 038, World Institute for Development Economic Research (UNU-WIDER).
    9. John Rand, 2017. "Comparing estimated and self-reported markups for formal and informal firms in an emerging market context," WIDER Working Paper Series 160, World Institute for Development Economic Research (UNU-WIDER).
    10. Axel Demenet, 2016. "Does Managerial Capital also Matter Among Micro and Small Firms in Developing Countries?," Working Papers DT/2016/12, DIAL (Développement, Institutions et Mondialisation).
    11. Huong Vu & Steven Lim & Mark Holmes & Tinh Doan, 2013. "Firm Exporting and Employee Benefits: First Evidence from Vietnam Manufacturing SMEs," Economics Bulletin, AccessEcon, vol. 33(1), pages 519-535.
    12. Tulio Cravo & Caio Piza, 2016. "The Impact of Business Support Services for Small and Medium Enterprises on Firm Performance in Low -and Middle- Income Countries: A Meta-Analysis," IDB Publications (Working Papers) 94938, Inter-American Development Bank.
    13. repec:dau:papers:123456789/11191 is not listed on IDEAS
    14. Dang, Thang, 2017. "Education as Protection? The Effect of Schooling on Non-Wage Compensation in a Developing Country," MPRA Paper 79223, University Library of Munich, Germany.
    15. Amin, Mohammad & Islam, Asif, 2015. "Are Large Informal Firms More Productive than the Small Informal Firms? Evidence from Firm-Level Surveys in Africa," World Development, Elsevier, vol. 74(C), pages 374-385.
    16. Smriti Sharma, 2014. "Benefits of a registration policy for microenterprise performance in India," Small Business Economics, Springer, vol. 42(1), pages 153-164, January.
    17. Vu, Van Huong, 2012. "Does export participation affect wages and employment quality? the case of Vietnamese SMEs," MPRA Paper 38696, University Library of Munich, Germany.
    18. Benedikter, Simon & Waibel, Gabi & Birtel, Serge & Bui, Cuong The & Tran, Be Thanh, 2013. "Local Entrepreneurship in Vietnam’s Rural Transformation. A Case Study from the Mekong Delta," MPRA Paper 49866, University Library of Munich, Germany.
    19. Boly Amadou, 2015. "On the Effects of Formalization on Taxes and Wages: Panel Evidence from Vietnam," WIDER Working Paper Series 042, World Institute for Development Economic Research (UNU-WIDER).
    20. Siba, Eyerusalem, 2015. "Returns to Physical Capital in Ethiopia: Comparative Analysis of Formal and Informal Firms," World Development, Elsevier, vol. 68(C), pages 215-229.
    21. Elisa Calza & Micheline Goedhuys & Neda Trifkovic, 2017. "Drivers of productivity in Vietnamese SMEs: The role of management standards and innovation," WIDER Working Paper Series 068, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    Keywords

    formality; employment; Vietnam;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:wdevel:v:40:y:2012:i:5:p:983-998. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/worlddev .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.