Business Environment Reform leads to new firms being started or registered

This page outlines the evidence showing that reforms to the business environment may lead to new firms starting up or existing firms becoming formal.

Reforms which make it cheaper and easier to register a business have been widely implemented in the past decade – partly motivated by findings that lower barriers to business entry (proxied by the number of procedures to start a business as well as other indicators) are correlated to higher percentages of firm registration and entry (Klapper et.al., 2007). Evidence on the impact of reforms to make business registration easier is however mixed.

Cross-country reviews

Based on cross-country reviews, it appears that only reforms that signficantly reduce the time and costs of business registration are effective.

  • Comprehensive reviews (Klapper and Love, 2010 and Klapper and Love, 2014) find that when registration reforms are sizeable – on average a 40% or more reduction in procedures, or 50-60% or more reduction in costs and days – they do increase the number of firm registrations. Likewise, where 2 or more business environment indicators are improved in a relatively short space of time, new firm registration is more likely to accelerate.

Streamlining business registration regulations and processes

There are several examples of sizeable country-level reforms leading to modest to large increases in business registrations:

  • One-stop-shops are one approach to significantly reduce the number of procedures and visits necessary to register a business with all the relevant authorities. One-stop shops have lead to increases in firm registration of 5-6% in urban areas of Colombia (Cárdenas and Rozo, 2007) and Mexico (Bruhn, 2011; Kaplan, Piedra and Sierra, 2011) – although no significant effect was found in rural Brazil (Bruhn and McKenzie, 2013).
  • In India, the removal of at least four procedures to start a business, as part of the elimination of the License Raj, is estimated to have led to a 6% increase in the number of new firms in 16 Indian states between 1980 and 1997, after controlling for various other factors such as labour market laws and trade liberalisation (Aghion et al., 2008). As a result of the USAID-funded Georgia Business Climate Reform Project, which significantly streamlined business and tax registration procedures in Georgia, the number of businesses registered increased by 67% between 2005 and 2009 (USAID, 2009).
  • Electronic Business Registration, when introduced as part of broader government-led reforms to business entry registration, lead to increases in firm registration of more than 20% in Guatemala, Sri Lanka and Jordan (Klapper, 2007).

Information about the benefits of business registration and targeted incentives

There are both ongoing costs, most notably taxes, and potential benefits, such as the ability to advertise and offer tax receipts, associated with formalisation. Only firms which expect these benefits to outweigh the costs would rationally formalise, even if registration is made easier. A key question is therefore how to shift the perceived costs and benefits of formalisation, including by providing information about the benefits of reform and/or by providing financial and non-financial incentives.

The evidence on information sharing and waiving registration costs is mixed:

  • No effect: De Giorgi and Rahman (2013) find that providing face-to-face information about a major business registration reform initiative in Bangladesh improved firms’ knowledge of the new registration procedures, but did not increase the probability of registration. Similarly, in a field experiment in Sri Lanka (de Mel, McKenzie and Woodruff, 2013), information about the registration process to informal firms and reimbursement of direct registration costs did not increase registration. Further, a field experiment in Brazil (de Andrade, Bruhn and McKenzie, 2013) found no positive impact of information and free registration on formalisation.
  • Modest benefits: A study by Benhassine et al (2016) in Benin finds that few firms register when just given information about the new regime, but personalized visits to firms coupled with an explanation of benefits and assistance filling out forms induced 9.6%of informal firms to formalize. Similarly , a study of a random sample micro-enterprises in Lima by Jaramillo (2009) finds when offered payment for the cost of the licence and guidance through registration procedures, 25% obtained a licence
  • Significant benefits: A randomised control experiment in Malawi (Campos, Goldstein and McKenzie, 2015), however, finds that information and assistance with cost-free business registration encouraged even 75% of firms to formalise; however, no impacts were found on tax registration.

Information and additional services as incentives seem to be more effective than information alone:

  • In Benin, personalised information visits coupled with supplementary services in the form of access to business training, bank accounts, and tax mediation services induced 16.3 % of firms in the sample to formalise (Benhassine et al. 2016).

Financial incentives seem to have a modest positive (short-term) impact on formalisation:

  • While information alone did not influence firms’ decision to register in a field experiment in Sri Lanka (de Mel, McKenzie and Woodruff, 2013), payments equivalent to one-half to one month (alternatively, two months) of the median firm’s profits lead to registration of around one-fifth (alternatively, one-half) of firms.
  • A study that focused on the role of tax incentives (Bruhn and Loeprick, 2014) in Georgia found some short term positive effects on the registration of small enterprises, but no effects in the year after the reforms.

Inspection visits

Inspection visits seem to have signficant impact on the likelihood of firms formalising, but the evidence base is limited:

A field experiment in Brazil found that receiving inspection visits made firms 21-27% more likely to formalise. The authors argue that the tax revenue benefits to the government of bringing firms into the formal system more than offset the costs of inspections. (de Andrade, Bruhn and McKenzie, 2013)