Why Formality Does Not Always Benefit Firms. Learning from Mozambique

Empirical evidence indicates that formality-official registration with the state-often fails to deliver the anticipated positive outcomes for firms in low-income countries. However, detailed explanations for this phenomenon remain scarce. This study provides an in-depth analysis of why formality often does not benefit firms. Using standard quantitative methods, I examine the effects of formality on firms in Mozambique. Beyond this, I incorporate qualitative case studies through semi-structured interviews and participant observation to explain and contextualize why the effects of formality do (or do not) materialize. The findings reveal that firms fail to benefit from formality because achieving formal status is just one step in a longer process. To truly benefit, firms must also meet various economic and non-economic requirements, such as having a formal financial history or an extensive social network. Many firms, particularly the smallest ones, lack these prerequisites and, therefore, do not gain from formality. Furthermore, the Mozambican government’s limited capacity to provide supportive services and address corruption impedes firms’ ability to leverage formalization, enabling only few to thrive. This study highlights the urgent need for structural reforms and inclusive strategies to unlock firms’ potential.