TY - JOUR
T1 - How do small formal and informal firms in Egypt compare? An analysis of firm characteristics and implications for formalization efforts
AU - Krafft, Caroline
AU - Assaad, Ragui
AU - Rahman, Khandker Wahedur
AU - Cumanzala, Maakwe
N1 - Publisher Copyright:
© 2024 The Authors. Review of Development Economics published by John Wiley & Sons Ltd.
PY - 2024
Y1 - 2024
N2 - Formalizing firms can potentially increase the tax base, expand safety and social protections for workers, create good jobs, and promote firm growth. However, the costs and processes of formality may be too challenging for some firms to bear. Thus, informal firms may not be able to survive the transition to formality, and attempts to expand formality through more intensive enforcement may be harmful and counterproductive to job creation and growth. This paper investigates the potential for currently informal firms to formalize in Egypt. The paper compares the characteristics of formal and informal micro and small nonagricultural firms and identifies the extent of similarities and potential for formalization. The analysis finds that, beyond firm size and whether the firm operates in a fixed establishment, the basic and easily observable characteristics of firms are not closely linked to formality. Firm age, productivity, and owner characteristics, such as education, are strongly predictive of formality. The predicted probability of being formal is greater than 50% for only about 26% of informal firms, suggesting most firms are not good candidates for formalization. The paper develops profiles (groups and clusters) of similar firms to identify those with a higher potential for formalization.
AB - Formalizing firms can potentially increase the tax base, expand safety and social protections for workers, create good jobs, and promote firm growth. However, the costs and processes of formality may be too challenging for some firms to bear. Thus, informal firms may not be able to survive the transition to formality, and attempts to expand formality through more intensive enforcement may be harmful and counterproductive to job creation and growth. This paper investigates the potential for currently informal firms to formalize in Egypt. The paper compares the characteristics of formal and informal micro and small nonagricultural firms and identifies the extent of similarities and potential for formalization. The analysis finds that, beyond firm size and whether the firm operates in a fixed establishment, the basic and easily observable characteristics of firms are not closely linked to formality. Firm age, productivity, and owner characteristics, such as education, are strongly predictive of formality. The predicted probability of being formal is greater than 50% for only about 26% of informal firms, suggesting most firms are not good candidates for formalization. The paper develops profiles (groups and clusters) of similar firms to identify those with a higher potential for formalization.
KW - Egypt
KW - firms
KW - formality
KW - microenterprises
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U2 - 10.1111/rode.13101
DO - 10.1111/rode.13101
M3 - Article
AN - SCOPUS:85189769462
SN - 1363-6669
JO - Review of Development Economics
JF - Review of Development Economics
ER -