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What Determines Firms’ Decisions to Formalize?

Author

Listed:
  • Neil McCulloch
  • Günther G. Schulze
  • Janina Voss

    (Department of International Economic Policy, University of Freiburg)

Abstract

In this paper we analyze the decision of small and micro firms to formalize, i.e. to obtain business and other licenses in rural Indonesia. We use the rural investment climate survey (RICS) that consists of non-farm rural enterprises, most of them microenterprises, and analyze the effect of formalization on tax payments, corruption, access to credit and revenue, taking into account the endogeneity of the formalization decision to such benefits and costs. We show, contrary to most of the literature, that formalization reduces tax and corruption payments. The benefits of formalization, and therefore the likelihood of being formal, also depend on characteristics such as firm size, as well as the education and ethnicity of the owner.

Suggested Citation

  • Neil McCulloch & Günther G. Schulze & Janina Voss, 2010. "What Determines Firms’ Decisions to Formalize?," Discussion Paper Series 13, Department of International Economic Policy, University of Freiburg, revised Nov 2010.
    • Handle: RePEc:fre:wpaper:13
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    More about this item

    Keywords

    Formalization; rural development; rural investment climate; informal sector;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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