To be or not to be registered? Explanatory factors behind formalizing non-farm household businesses in Vietnam

Abstract

This article sets out to investigate the reasons why some household businesses decide to register and become formal (while others do not) in order to shed light on the origins of informality. We use qualitative as well as quantitative data on household businesses (HB) derived from first-hand representative surveys implemented in Hanoi and Ho Chi Minh City. The study reveals that although most of the informal businesses operate 'illegally', this is more due to unclear registration legislation than the mark of a deliberate intention to evade the economic regulations. Among the different factors that influence the registration decisions, the reason for setting up the business appears to be a determining one: the more it is a real choice (businesses set up to be independent or to follow a family tradition) and the less a constraint (set up for lack of a job alternative), the more the HB is inclined to be registered. Furthermore, the analysis highlights that incentives do prove decisive insofar as the probability of having a formal business is greater among HB heads who consider that registration provides at least partial protection from corruption. Besides, access to information, the market and large business orders also drive the informal entrepreneurs to register. These results stress the need for clarification of the legal framework as well as incentive policies in order to address the issue of informality.

Do Informal Businesses Gain From Registration and How? Panel Data Evidence from Vietnam

“…The uncomfortable environment, in which IHBs operate, with the risk of being victim of arbitrary decision, is also illustrated by the fact that most of them consider that they would be less subject to corruption if they can register their business (Cling et al, 2012). But since IHBs may also need to feel secure, with cleaner, more predictable government institutions, to consider the formalization of their business (Malesky & Taussig, 2009) they might be trapped in a vicious circle.…”

“…The first one was undertaken in 2009 to investigate further the characteristics of IHBs, the motivations of the businesses' heads and their attitude toward registration. In-depth semi-structured interviews were conducted with 60 HBs in the two cities Cling, Razafindrakoto, & Roubaud, 2012). The second survey consists in 10 semi-structured additional interviews conducted in Ho Chi Minh City in 2013 with businesses operators selected from the observations of the panel that had formalized or informalized their activity.…”

Comparing estimated and self-reported mark-ups for formal and informal firms in an emerging market context

“…In the context of Viet Nam, Cling et al (2010) Cling et al (2012, and Demenet et al (2016) provide a detailed description of the problems faced when trying to measure levels of firm registration and, in turn, the relationship between firm profitability (mark-ups) and informality. Informal businesses can often be labelled 'own-account' workers (Maloney 2004) and are generally very small subsistence-level units with limited ability to expand.…”

Why do household businesses in Vietnam stay informal?

“…There are two reasons for paying more attention to the 'top' tier. First, only these households can consider costs and benefits of formalization whereas businesses in the 'lower' tier are too weak to afford the cost of formalization (Cling et al, 2012). Second, while empirical evidence (Demenet et al, 2016) and our descriptive statistics show that formalized businesses often belong to the 'upper' tier, a significant proportion of businesses in this spectrum of the informal sector remains informal.…”

“…In spite of the benefits of formalization such as the improvement in firms' profits and customer base, better access to infrastructure and other public goods, and protection from corruption (Boly, 2017;Cling et al, 2012;Demenet et al, 2016;Fajnzylber et al, 2011;McKenzie and Sakho, 2010;Rand and Torm, 2012a), the informal sector remains large (La Porta and Shleifer, 2014;Williams et al, 2016). This sector is observed with a heterogenous structure which is composed of 'lower' tiers of vulnerable workers with low levels of education and 'upper' tiers of high earnings and skilled employers.…”