Why enterprise formalization?The incidence of informal enterprises is high, particularly in developing countries where the informal economy provides a source of livelihood for people who cannot enter the formal labour market. Informal enterprises are often characterised by low productivity and decent work deficits, they do not generate public revenues and they tend to engage in unfair competition with formal enterprises. Therefore, the ILO conducts research and provides advisory services to constituents to create a more enabling environment that facilitates enterprise formalization, for example though appropriate and well-coordinated legislation, policies and compliance mechanisms that facilitate enterprise formalization. This work is combined with direct measures to support enterprise formalization, such as business development services and measures that make business registration cheaper, easier and more attractive.
The work undertaken by the team contributes to the SDG Goals of Agenda 2030, and builds on Recommendation 204 concerning the Transition from the Informal to the Formal Economy, which was adopted by the ILC in 2015.
What do we know about enterprise formalization?The International Labour Organization (ILO) is focused on the creation of full and productive employment and decent work for all, yet the presence of a large and sometimes growing informal economy presents a significant challenge to this work. There are a wide range of varying economic, social and political factors that affect the size and nature of the informal economy. This makes it difficult to develop a single response that can be applied in all countries and regions.
A recent literature review and findings from other studies suggest the following policy conclusions:
- informal firms are making a rational choice on whether or not to formalize by comparing the expected benefits of becoming formal to the cost of doing so
- reducing the cost of being formal (taxes, social security contributions) might be more important than reducing the cost of becoming formal (time and money for registering)
- it is probably not so much the registration cost but the expected benefits of formalization that is pivotal for the decision to formalize
- business entry reforms can succeed in increasing the number of registered firms at a very good cost benefit ratio in terms of additional income and employment creation
- big pushes and combining several reform measures may work better than piecemeal approaches. Single reforms have to go for a large reduction of formalization cost in order to achieve a significant effect
- it seems to be easier to formalize firms while they are being set up than to formalize firms that already exist