The effects of firm formalization — a mixed-method study on Mozambique

IGM Seminar Series

On 17 September 2020, Hanna Berkel, researcher at the University of Copenhagen, will discuss her latest research on the impact of formalization on Mozambican firms.  

The presentation is based on the working paper ‘The effects of firm formalization: A mixed-method study on Mozambique’ (in progress). 

The presentation will be in Portuguese. 

To join the seminar and take part in the discussion, register here. By registering, you agree to be added to UNU-WIDER’s customer relationship management system under the Institute’s terms and conditions (Privacy statement and Disclaimer). 

Please note that the presentations will be recorded. The presentation slides and the recording will be shared with the seminar participants soon after the event. 

About the research 

One of the aims of the Mozambican government and international donors is to formalize informal companies (those not registered by the state). To this end, several reforms have been introduced in recent years, such as the establishment of the Balcão de Atendimento Único (BAÚ, or, Single Service Desk) for companies, covering all provinces, and the adoption of simplified licensing and tax systems. However, although regulations are easier in many African countries, most informal businesses are not formalized. Therefore, researchers have begun to investigate whether the effects of formalization are as beneficial as suggested by theory, and what are the costs involved. In fact, the scientific literature suggests that formalization may not be as positive as previously assumed and that its consequences depend very much on the characteristics of each company. 

This paper investigates the effects of formalization for manufacturing companies in Mozambique, something that has never been done before. It is also the first study on formalization that applies in a complementary way both quantitative and qualitative methods, an approach known as “mixed-methods” or multiple methods. It starts with a fixed effects model, which is combined with qualitative process tracking techniques. In this way, qualitative results complement the quantitative ones and highlight some of the weaknesses of quantitative analysis that are often ignored by researchers. 

In this study, the following results stand out: 

  • On the one hand, formalization results in a wider customer base because formalized companies can do business with state-owned companies and other formal agents. 
  • On the other hand, formalization is associated with a greater number of inspections by State agents and these often involve fines or corruption. 
  • Formalization does not appear to increase access to credit for companies. 
  • Furthermore, just because a company is formalized does not mean that it can automatically sell its products to other formal economic agents. It is often necessary to have good contacts that help companies with complicated paperwork and access to the benefits of formalization. 

These results suggest that only businesses with a good network of contacts and some specific characteristics find advantages in formalization. Quantitative analysis fails to consider these aspects. In addition, regression in an observational study like the present one always suffers from 'post-treatment bias', which makes it difficult to establish causal links, that is, makes it difficult to assess the exact effects of formalization for companies. 

About the IGM Seminar Series  

The online IGM Seminar Series provides a space to discuss research themes with a focus on the challenges of promoting inclusive growth in Mozambique at a time of overlapping crises: the economic and financial crisis of hidden debt, the climate crisis, and the global health crisis.