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Informality and Regulations: What Drives Firm Growth?

Author

Listed:
  • Ms. Era Dabla-Norris
  • Ms. Gabriela Inchauste
Abstract
The paper relies on a rich firm-level data set on transition economies to examine the role of informality as an important channel through which regulatory and other policy constraints affect firm growth. We find that firms reduce their formal operations with a higher tax and regulatory burden, but increase it with better enforcement quality. In terms of firm growth, we find a differential impact of regulatory burden and enforcement quality on formal and informal firms. In particular, we find that growth in formal firms is negatively affected by both tax and financing constraints, while these constraints are insignificant for growth in informal firms. Moreover, formal firm growth improves with better enforcement as measured by fair and impartial courts, while informal firm growth is constrained by organized crime, pointing to their inability to take full advantage of the legal and judicial systems. Finally, when we look at country-wide institutions, we find that higher regulatory burden reduces firm growth. An interactive term between a country-wide measure of the rule of law and a proxy for formality suggests that better enforcement quality dampens the relatively weaker growth in formal firms.

Suggested Citation

  • Ms. Era Dabla-Norris & Ms. Gabriela Inchauste, 2007. "Informality and Regulations: What Drives Firm Growth?," IMF Working Papers 2007/112, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2007/112
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    References listed on IDEAS

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    Cited by:

    1. Cristina Fernández & Leonardo Villar & Nicolás Gómez, 2017. "Taxonomía de la informalidad en América Latina," Coyuntura Económica, Fedesarrollo, vol. 47(1 y 2), pages 137-167, December.
    2. Aysa Ipek Erdogan, 2023. "Drivers of SME Growth: Quantile Regression Evidence From Developing Countries," SAGE Open, , vol. 13(1), pages 21582440231, March.
    3. F. Stam & Neil Thompson & Andrea Herrmann & Marko Hekkert, 2012. "The Environmental Regulation Paradox for Clean Tech Ventures," Scales Research Reports H201217, EIM Business and Policy Research.

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