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 (e.g. taxes, social security contributions) might be more important than reducing the cost of becoming formal (e.g. 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.

What is our approach?

We support our constituents to gather information on informal enterprises and the environment in which they operate. This is done through primary and secondary data collection. Based on a process of dialogue with constituents, we provide support to identify prioritized actions to foster enterprise formalization. Priorities may consist of reform measures, incentives and business support programmes. Once the priorities have been agreed we assist in the design, implementation, monitoring and evaluation of the enterprise formalization strategy.

More information on our enterprise formalization approach can be found in the Product Offer .