Formal Registration and Informal Firms in Cambodia

Discussion Papers

No.807

by Kiyoyasu Tanaka

February 2021

ABSTRACT

This paper estimates the impact of formal registration on firm-level performance. I construct a unique panel dataset on both formally registered and unregistered establishments in Cambodia for 2011 and 2014. The sample includes 8,350 informal firms in 2011, of which 216 firms obtained a formal registration in 2014. To mitigate selection bias, I employ a difference-in-differences method combined with propensity-score matching and a propensity-score-weighted regression method. My results show a significantly positive impact of formalization on sales and value added, but little significant effect on labor productivity. Formalization increases non-wage expenditures significantly, consistent with the hypothesis that formalized firms increase their purchases from other formal firms to benefit from Cambodia’s value added tax system.

Keywords: Informal sector, formalization, registration, Cambodia

JEL classification: O12, O17, D22

Please note that discussion papers are works in various stages of progress and most have not been edited and proofread and may contain errors of fact or judgment. Revised versions of these papers may subsequently appear in more formal publication series. The views expressed in this publication are those of the author(s). The IDE does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use.