Navigating Growth: A Formalized Approach to Small Firm Revenue and Profit Enhancement

Navigating Growth: A Formalized Approach to Small Firm Revenue and Profit Enhancement | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Navigating Growth: A Formalized Approach to Small Firm Revenue and Profit Enhancement MD Abdul Bari, Arifuzzaman Khan, Ghulam Dastgir Khan, Yuichiro Yoshida This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-3846645/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract Governments often have strong motivation to formalize ever-growing informal firms. However, whether formalization improves the earnings of small firms is a crucial policy question. Firms chose to be formal so the impact evaluation of formalization suffers for self-selection bias. This study aims at examining the impact of the impact of formalization on revenue and profit of informal small firms using Randomized Encouragement Design. Small firms in Malawi, one of the poorest countries, are considered as the units of analysis in the present study. This study uses dataset prepared by Campos et al. ( 2018 ) who conducted Randomized Control Trial to examine different ways to formalize small firms in Malawi. Campos et al. ( 2023 ) examined the impact of Offer for cost-free business registration, coupled with a bank account opening information session as one of the treatment variables and formalization as one of the outcome variables in their study. In contrast, this study considers the offer for cost-free business registration, coupled with a bank account opening information session as an instrumental variable and formalization as the treatment variable. The result shows that formalization significantly increases revenue and profit of small firms. Heterogeneous impact analysis suggests formalization helps only manufacturing farms to earn more. Formalization Informal Firms Revenue Profit Heterogeneous Impact Figures Figure 1 Figure 2 1. Introduction 1.1 Background: The concept of formalization has become a pivotal policy tool aimed at linking informal firms with governmental established economic frameworks for a long time (Gallien & Boogaard, 2023 ). In developing economies, majority of people depends on informal economy as their income comes either from farming or from small unregistered firms (Blades et al., 2011 ). Informal economy offers employment for more than two billion people of the global economy (Dell'Anno, 2022 ) and around 40% of total economic activity is conducted under informal firms in the poorest country (Campos et al.,2023). As a result, Governments in developing countries often have strong motivation to formalize ever-growing informal firms to ensure implementation of policy initiatives, laws, taxes and information management (Nelson & Bruijn, 2004). Formalization is often associated with more profit, customer base, access to public goods like electricity and energy, and finally formalization protects from corruption (Tran & La, 2020 ; McKenzie & Sakho, 2010 ). Moreover, Sustainable Development Goal (SDG) 8 seeks to formulate comprehensive policies to create decent jobs, encouraging the formalization and expansion of informal firm by facilitating access to financial services (Kiaga & Leung, 2020 ). Whereas formalization is supposed to increase welfare for small firms but yet informality is deep rooted in contextual complexity and the socio-political dynamics based on power structures (Gallien & Boogaard, 2023 ). Thus to examine whether formalization improves the earnings of small firms is a crucial policy question. This study aims at examining the impact of the impact of formalization on revenue and profit of informal small firms using a rigorous causal identification. In African countries like Malawi, 93 per cent of the firms remain unregistered with the Government (Campos et al., 2018 ). Malawian government wants to motivate informal firms to be formalized to implement their policies. Malawi is selected as case study of developing countries where formalization process is hard to implement. This research highlights whether formalization can bring about welfare for small firms. The informal sector consists of small and medium enterprises involved in economic activities outside of government regulation or taxation. Informal firms have less access to government supported programs than formalized firms, and may even actively avoid accessing such programs to avoid taxation and regulation (Nguyen et al., 2014 ). Formalization can be defined a process through which an organization comes under the rules, laws, policies and strategies formulated by the Government. Definition of formalization is relative one and this study considers having business registration and a business account as the eligibility of being formalization. Firms choose to be formal so the impact evaluation of formalization suffers for self-selection bias and casual inference requires addressing the bias. The present study applies a randomized encouragement design to examine causal impact of formalization using instrumental variable estimation. Randomized Encouragement Design addresses endogeneity bias using instrumental variable (Sajons, 2020 ). The instrumental variable estimation addresses limitation of ITT analysis as it captures the average treatment effect of the compliers (Angrist et al., 1996 ). This study uses dataset prepared by Campos et al. ( 2018 ) who conducted Randomized Control Trial to examine different ways to formalize small firms in Malawi. Campos et al. ( 2023 ) examined the impact of Offer for cost-free business registration, coupled with a bank account opening information session as one of the treatment variables and formalization as one of the outcome variables in their study. In contrast, this study considers the offer for cost-free business registration, coupled with a bank account opening information session as an instrumental variable and formalization as the treatment variable. The offer for cost-free business registration, coupled with a bank account opening information session, serves as an instrumental variable or randomized encouragement to estimate the local average treatment effect of formalization. Instrumental variables estimation mitigates confounding by utilizing a valid instrumental variable that must be random, relevant and exclusively restricted (Baiocchi et al., 2014 ). Present study has two objectives. Firstly, this study aims to examine the causal impact of formalization on small firm profit and revenue. Secondly, this study aims to explore heterogeneous impact of formalization on small firm profit and revenue. This study has a policy implication for exploring the relevance of motivating formalization of small informal firms, considering heterogeneity issues. 1.2 Theoretical Framework The theoretical underpinning of formalization presents diverse perspectives; each perspective offers unique insights into the motivations and impediments surrounding the formalization process. From the legalistic perspective (Lapeyre & Lemaître, 2014 ), issues arise from inflexible formal sectors and a plethora of taxes, prompting calls for legislative modifications aligned with economic conditions whereas the neoliberal viewpoint (De soto, 1989 ) emphasizes the role of government interference and cumbersome regulations as drivers for informal sector operation, suggesting that a streamlined legislative framework can create conducive environment for formalization. Further, the structuralist perspective (Lapeyre & Lemaître, 2014 ) underscores the need for robust state regulations and organizations, while the institutionalist perspective (North, 1990 ) focuses on overcoming institutional limitations through governmental intervention and flexible laws. Moreover, the neoclassical microeconomic approach (Bacchetta et al., 2009 ) posits that excessive laws and administrative constraints contribute to the emergence of the informal sector. To counter this, incentives that align with individual achievements and projected earnings are recommended. Theoretical models, including the Exclusion Model (De Soto, 2003 and 1990 ), Rational Exit Model (Maloney, 2004 ), Parasite Model (Baily et al., 2006 ; Farrell, 2006 ), and Dual Economy Model (La Porta and Shleifer, 2014 ), further enrich our understanding, offering frameworks to analyze the complexities surrounding formalization decisions. Empirical evidence and policy interventions are explored through various lenses, such as the exclusion model policies, rational exit model policies, and parasite model policies. Insights from these studies reveal the intricate nature of the formalization process, emphasizing the nuanced impact of diverse policy interventions on informal businesses. Challenges such as unobserved heterogeneity, endogeneity concerns, and institutional variations across countries are integral aspects of the impact evaluation of formalization. Survival-oriented and growth-oriented informal activities, differences in responsiveness to policies, and variations in regulatory environments contribute to the complexity of formalization dynamics. By addressing these challenges, the present study aims to offer a comprehensive understanding of the factors influencing formalization in the specific context of small informal firms in Malawi. 1.3 Literature Review: A number of previous studies examined different perspectives on formalization of small firm. Most of the studies explored only correlation between formalization and firm’s welfare issues. Lay and Tafese ( 2020 ) explored positive correlation between formalization and firm’s productivity, whereas Berkel and Tarp ( 2022 ) failed to find any significant correlation between formalization and performance of firms. Shamsuzzoha and Tanaka ( 2021 ) explored positive correlation between formalization and performance of manufacturing firms. Further, Le et al., ( 2022 ) examined a negative correlation between formalization and bribing. Further, Boly ( 2020 ) examined formalization of small firms on tax payment. Kanbur (2019) explored causes and consequences of informality of firms using qualitative study. Similarly, Ulyssea et al., (2020) explored causes and consequences of informality. In addition, Oltra et al., ( 2018 ) examined formalization as a moderating factor to induce innovative practices. A number of studies conducted literature review to examine how diverse studies contributed to examine issues related to formality. Floridi et al., ( 2020 ) conducted systematic literature review to examine cost and benefit of formalization. Further, Xheneti et al., (2018) conducted literature review to examine significance of formalization for woman entrepreneurs. Thus there remains a scope to contribute to the literature through estimating causal impact of formalization. Few studies explored the ways to promote formalization. Using experimental design, De Giorgi et al., ( 2018 ) explored the firm visit induce formalization whereas Campos et al. ( 2018 ) who conducted Randomized Control Trial to examine different ways to formalize small firms in Malawi. Moreover, Piza ( 2018 ) examined tax simplification program in Brazil has no impact on the rate of formalization. Some studies attempted to examine causal impact of formalization but the findings are not conclusive on whether formalization has positive, negative or no impact on firm’s welfare. De Mel et al., ( 2013 ) examined the impact formalization of informal firms on their profit using Intention to Treat (ITT) analysis. Similarly, Benhassine et al., ( 2018 ) used ITT analysis and found that formalization has no impact on sale or profit of firms. However, ITT estimates only the impact of treatment assignment in place of treatment receipt. In other words, ITT analysis is free from selection bias because of random treatment assignment, but ITT is an inaccurate measure of the impact of the treatment itself (Little & Rubin, 2000 ). McKenzie and Sakho ( 2010 ) estimated the impact of tax registration as an indicator of formalization using instrumental variable, proximity to the tax office. Similarly, Ali and Marouani (2020) applied distance to the tax office as an instrumental variable. However, proximity to the tax office fails as an instrumental variable because it does not fulfill exogeneity condition as some firms self-select to reside near tax office or city center where a tax office is located. Further, proximity to the tax office does not satisfy exclusion restriction as proximity to tax office can have direct impact on welfare of a firm. Present study contributes to the existing literature in two ways. Firstly, this study aims to examine the causal impact of formalization on small firm profit and revenue, aiming to ascertain whether formalization has positive, negative or no impact on firm’s welfare. Secondly, this study examines heterogeneous impact of formalization on small firm profit and revenue as heterogeneity can change direction of the impact of any intervention. Section 2 includes consists of materials and method. Section 3 includes results and analysis followed by discussion and conclusion in Section 4 . 2. Materials and Method 2.1 Data Source This study uses the dataset prepared by Campos et al. ( 2018 ) with 3002 informal micro and small enterprises from urban Lilongwe and Blantyre, the major commercial cities in Malawi. To address gender disparities, female-owned enterprises are oversampled because of potential barriers to formalization and their smaller size on average. The stratified random sampling method was used to select the enterprises. This study uses 1964 small and micro enterprises of which 1207 enterprises were randomly assigned to receive Offer to cost free business registration along with bank account opening information session, whereas 757 enterprises remain in the control group. 1038 enterprises are excluded from this study because the excluded enterprises received different treatment which will hamper to obtain the causal impact of formalization as defined in this study. The baseline survey was conducted between December 2011 and April 2012. The second data source comprised of the baseline and four follow-up surveys. The offer and information session took place from June 2012 to September 2012, followed by surveys conducted approximately 4, 16, 28, and 35 months after the encouragement to formalize. This study considers the end line data after 35 months. The business registration process in Malawi involves completing the Application for Registration and submitting it with one passport photo or a copy of the National ID card to the Registrar General's office. The initial cost for registering as a sole trader or in partnership was MWK 200 or $1.30, which was later increased to MWK 2000 in mid-2012 ($8 in 2012 and $4 in 2013) and the official processing time is 14 days, though practical experiences vary, ranging from one day to two months, with the option of expedited processing through intermediaries at a higher cost (Campos et al., 2023 ). 2.2 Summary Statistics: Table 1 reports the summary statistics of the variables of the firms based on formality status. Female owners are more in the formal firms (37%) than informal firms (42%). The average age of the formal firm owners is 34 years, whereas the average age of informal firm owners is 33.34 years. 92% and 5% owners of the formal firms are literate and higher educated respectively, whereas 90% and 6% owners of the informal firms are literate and higher educated respectively. 8%, 72% and 20% of the formal firms are of manufacturing, retail and service respectively, whereas 6%, 70% and 24% of the informal firms are of manufacturing, retail and service respectively. The average age of the informal firms is 8.21 years, whereas the average age of formal firms is 7.78 years. 37% of formal firms have own space, while 32% of informal firms have own space. Average revenue and profit of the formal firms are 446609.96 Malawian pound (1 USD = 1687.54 Malawian pound) and 97641.29 Malawian pound respectively. On the other hand, average revenue and profit of the informal firms are 309114.10 Malawian pound and 70269.18 Malawian pounds respectively. Table 1 Summary statistics: Based on Formality Status Control: Informal Firms 1 = Owner is Female 0.42 0.49 0 1 Owner age 33.34 9.29 14.00 78 1 = Literate 0.90 0.30 0 1 1 = Higher education 0.05 0.22 0 1 1 = Manufacturing 0.06 0.24 0 1 1 = Retail 0.70 0.46 0 1 1 = Services 0.24 0.42 0 1 Firm Age (Years) 7.78 7.28 1 49 1 = Owns space 0.32 0.47 0 1 Revenue last month 309114.10 534258.44 0 4500000 Profit last month 70269.18 93261.65 0 725000 2.3 Identification Strategy: Formalization is an endogenous variable because a firm selects to be formalized. Thus to examine the impact of formalization needs to deal with self-selection bias. Self-selection creates endogeneity problem that occurs when a treatment variable is correlated to the error terms (Ullah et al., 2021 ). This study applies Randomized Encouragement Design as a robust identification to estimate the causal impact (West et al., 2008 ) as an alternative to Randomized control trial, the gold standard. Randomized Encouragement Design utilizes instrumental variable (IV) approach that addresses endogeneity issue if conditions of IV are satisfied (Angrist et al., 1996 ). Instrumental variable explores causal inferences on the impact of a treatment on an outcome (Burgess et al., 2017 ). Offer to cost free business registration along with bank account opening information session is considered as an instrumental variable or randomized encouragement to estimate the local average treatment effect of formalization. Offer to cost free business registration along with bank account opening information session fulfills the three conditions of instrumental variable setting. As the offer and session are randomized so fulfill exogenity condition. Then, the offer and session has direct impact on formalization process thus they fulfill relevance condition. Finally, the offer and session fulfill exclusion restriction condition, having no direct impact on revenue or profit of firms. As an instrumental variable setting, this study has three types of firms: compliers, never takers and always takers. Firms are compliers if its formalization depends on the offer and the information session. In other words, complier firms become formalized if they receive offer and the information session whereas complier firms remain informal if they do not receive offer and the information session. Then the Always Taker firms are those that formalize whether they receive offer and the information session or not. In contrast, the firms are never takers if they remain informal whether they receive offer and the information session or not. Two stage least square is used in Randomized Encouragement Design to estimate local average treatment effect (LATE). The first stage estimation uses the following equation: Equation for First stage Estimation : \({F}_{i}={a}_{0}+\pi {E}_{i}+{{\mu }}_{i}\) In this case, \({F}_{i}\) is a dummy variable of Formalization Status, taking the value 1 if the firm has business registration and a business account. \({E}_{i}\) is the IV dummy equating 1 if a firm is offered cost free business registration along with bank account opening information session. From the first stage predicted \({F}_{i}\) is estimated and after that the below second stage equation is used to measure local average treatment effect: Equation for Second StageEstimation : \({ R}_{i}={\beta }_{0}+{\rho }_{c}{\widehat{F}}_{i}+{\epsilon }_{i}\) \({R}_{i}\) are the outcome variables. Here, the local average treatment effects are estimated by \({\rho }_{c}\) . \({\widehat{F}}_{i}\) is the predicted formalization dummy. \({\rho }_{c}\) is the main treatment effect of formalization and it refers to local average treatment effect of compliers. 3. Results and Analysis 3.1 Main Results: Table 2 reports that offer to cost free business registration along with bank account opening information session as instrumental variable has significant positive impact on formalization status of small firms at 1% significance level. The first stage result also affirms the relevance condition offer to cost free business registration along with bank account opening information session as instrumental variable. In other words, offer to cost free business registration along with bank account opening information session as instrumental variable increases the formalization of small firms. Table 2 Impact of the Offer and Information Session on Formalization (1) VARIABLES Formalization Instrumental Variable 0.58*** (0.01) Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1 Table 3 reports that formalization has significant positive impact on profit and revenue of small firms at 1% significance level. In other words, formalization increases profit and revenue of small firms. Table 2 reports formalization increases profit of small firms by 22803.64 Malawian pound and revenue of small firms by 161,777.80 Malawian pound. Table 3 Impact of Formalization on Profit and Revenue in Malawian pound (1) (2) VARIABLES Profit Revenue Formalization Status (0/1) 22,803.64*** 161,777.80*** (8,206.87) (58,910.28) Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1 Figure 1 demonstrates comparison of profit between formal and informal firms. The figure illustrates that profit of formal firms are comparatively higher than that of informal firms. The average profit of formal firms is 101255.66 Malawian pounds and the average profit of informal firms is 61261.51 Malawian pounds. Figure 2 demonstrates comparison of revenue between formal and informal firms. The figure illustrates that revenue of formal firms are comparatively higher than that of informal firms. The average revenue of formal firms is 523054.41 Malawian pounds and the average revenue of informal firms is 344326.41 Malawian pounds. 3.2 Balancing Test Table 4 reports the balancing test of pretreatment covariates of the firms based on IV status. In other words, this table reports whether pretreatment covariates of the firms were balanced based on whether a firm received offer or not. The result shows that none of the pretreatment covariates of the firms were significantly different between those who received offer and those who did not receive offer. Table 4 Balancing Test of Pretreatment Covariates Variable Treatment Assigned Control Assigned Difference 1 = Owner is Female 0.40 [0.49] 0.40 [0.49] -0.01 (0.02) Owner age 33.33 [8.82] 34.00 [9.34] 0.67 (0.42) 1 = Literate 0.91 [0.29] 0.91 [0.29] 0.00 (0.01) 1 = Higher education 0.05 [0.23] 0.05 [0.22] -0.00 (0.01) Age of firm 7.72 [7.02] 8.30 [7.32] 0.58* (0.33) No Employees 2.05 [1.28] 2.01 [1.17] -0.04 (0.06) Capital 173162.48 [490218.38] 176145.82 [756949.73] 2983.34 (28143.93) 1 = Owns space 0.33 [0.47] 0.35 [0.48] 0.03 (0.02) Revenue last month 224986.81 [2117546.77] 190317.86 [712952.13] -34668.95 (79658.73) Profit last month 36495.09 [57865.18] 34477.68 [39402.95] -2017.41 (2389.56) Observations 1207 757 1964 Notes: Standard Deviation in square brackets. Standard Error in parenthesis. * p < 0.10 ** p < 0.05 *** p < 0.01 3.3 Heterogeneous Impact: Table 5 reports the heterogeneous impact of formalization based on business type. The result shows that formalization has significant positive impact on profit and revenue of only manufacturing small firms. However, impact of formalization on profit and revenue of retail and service related small firms is not statistically significant. Table 4 reports formalization increases profit of manufacturing small firms by 27539.50 Malawian pound (1 USD = 1,687.54 Malawian pound) and revenue of manufacturing small firms by 171352.80 Malawian pound. Table 5 Heterogeneous Impact of Formalization Based on Type of Business (1) (2) (3) (4) (5) (6) VARIABLES Profit (Retail) Profit (Manufacturing) Profit (Service) Revenue (Retail) Revenue (Manufacturing) Revenue (Service) Formalization Status (0/1) 36,461.89 27,539.50*** 845.33 275,114.10 171,352.80** 70,592.53 (34,372.39) (10,091.78) (13,615.34) (252,736.20) (72,980.60) (93,731.79) Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1 Furthermore, Table 6 reports the heterogeneous impact of formalization based on gender of firm ownership. The result shows that formalization significantly increases profit of male owned firms and revenue of female owned firms at 5% significance level. It can be concluded that formalization improves the situation of firms irrespective of gender of the owner. The result suggests that formalization does not have gender biased impact. Table 6 Heterogeneous Impact of Formalization Based on Gender of Ownership (1) (2) (3) (4) VARIABLES Profit (Female Owner) Profit (Male Owner) Revenue (Female Owner) Revenue (Male Owner) Formalization Status (0/1) 23,531* 22,717** 157,663** 162,317* (12,364) (10,644) (72,062) (82,980) Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1 4. Discussion and Conclusion Formalization is argued to promote growth of a firm but the evidence of the impact of formalization remains inconclusive. This study attempts to explore the empirical evidence of the impact of formalization on revenue and profit of small firms in Malawi. Revenue and profit are considered as the major indicators of the betterment of small firms. The findings of the study affirm that formalization increases the revenue and profit of small firms. This study gives empirical evidence that formalization has significant positive impact on revenue and profit of small firms. Formalization acts in a diverse way to promote revenue and profit of small firms. One of the way is that it decreases the external pressure of being illegal as suggested by Le et al., ( 2022 ) exploring a negative correlation between formalization and bribing. Further, formalization helps to meet the financing requirement of the small firms as formalization helps small firms to get external financing (Le et al., 2022 ). Further, Haruna ( 2023 ) argues that formalization promotes electricity access, usage of internet, size of firms, investment, accounting procedure, supply of product, customer coverage and competition. Further, Dada et al., ( 2022 ) argue that formalization helps to reduce the environmental degradation caused by informal firms like informal firm involved in metal works, obsolete vehicles, automotive repair as well as crude mining. Heterogeneous impact analysis gives an interesting finding that formalization increase revenue and profit of only manufacturing small firms and formalization has no conclusive impact on revenue and profit of retail or service related small firms. Heterogeneous impact suggests that formalization helps manufacturing farms to earn more. Our finding is supported by the study of Shamsuzzoha and Tanaka ( 2021 ) who also explored formalization is positively correlated to productivity. The inconclusive impact of formalization on revenue and profit of retail or service related small firms can be explained as formalization opens less opportunity for retail or service firms than manufacturing firms (Shamsuzzoha & Tanaka, 2021 ). Further, heterogeneous impact analysis based on gender of owner shows that male owned firms earn more profit whereas female owned firms earn more revenue if formalized. The intricate relationship between formalization and economic development has been a subject of significant scholarly inquiry, particularly in the context of developing economies. Within this broader landscape, this research aims to contribute to the understanding of formalization dynamics, specifically examining its impact on the revenue and profit of small informal firms in Malawi. As a nation grappling with economic challenges, Malawi serves as an illustrative case study where a substantial portion of businesses operates in the informal sector. In concluding our research endeavor, the study has illuminated various dimensions of the formalization process and its implications for small informal firms in Malawi. Through a robust methodological approach encompassing a Randomized Encouragement Design and instrumental variable estimation, we sought to navigate the complexities inherent in studying causal relationships in the context of informal economies. The theoretical foundations provided a rich tapestry of perspectives, offering a comprehensive understanding of the motivations and hindrances to formalization. As we delved into legalistic, neoliberal, structuralist, institutionalist, and neoclassical viewpoints, we found that the formalization landscape is multifaceted, requiring nuanced policy interventions tailored to the specific challenges faced by informal businesses in developing economies. The empirical evidence unveiled the intricate nature of formalization, highlighting the varied impact of different policy measures on formalization rates. From the exclusion model policies to the rational exit model policies and the parasite model policies, each approach revealed the need for a context-specific understanding of formalization dynamics. Formalization induced through policy brings large benefits than formalization induced through self-motivation, suggesting policy initiates need to be adopted to promote formalization (Floridi et al., 2021 ). The acknowledgment of challenges, including unobserved heterogeneity, endogeneity concerns, and institutional variations, underscores the need for nuanced analyses in the study of formalization. The survival-oriented and growth-oriented nature of informal activities, coupled with differences in responsiveness to policies, emphasize the need for policies that account for the diverse characteristics influencing formalization decisions. As nations grapple with the challenges and opportunities presented by informal economies, the findings of this research offer actionable insights for designing effective policies that encourage formalization and promote sustainable economic growth. In essence, this research contributes to the ongoing discourse on formalization, providing a nuanced understanding of the dynamics at play in small informal firms in Malawi. By integrating theoretical perspectives, empirical evidence, and policy implications, the study enriches general understanding of the factors shaping the formalization process and offers valuable insights for policymakers, practitioners, and researchers interested in fostering economic development and enhancing the well-being of small businesses in developing economies. This research provides a policy implication to promote formalization of informal firms through information seminars, easy and free business registration procedures, reducing payroll taxes, and subsidized registration cost (Jessen & Kluve, 2021 ). Moreover, governments of developing economies need to design both short term and long term comprehensive strategic plans. Taxation should be relaxed for small firms to sustain them. To formalize small firms, governments of developing countries have four reasons to extend the tax base, augment access to the formal economy, reinforce the rule of law, and acquire valued economic information for policy implementation (Campos et al., 2023 ). This study has certain limitations. Firstly, the definition of formalization as a treatment variable is based on subjective judgment in the present study. Secondly, the study estimates only average treatment effect of the compliers. Thirdly, the spillover effect cannot be examined because of the data unavailability. Future research needs to be conducted to examine the impact of formalization more comprehensively. Declarations Competing Interests: The authors declare no competing interests. References Akerlof, G. A., & Kranton, R. E. (2008). Identity, supervision, and work groups. American Economic Review , 98 (2), 212–217. 10.1257/aer.98.2.212 . Ali, N., & Marouani, M. A. (2020, December). 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The Impact of Formalization program on Informal Household Enterprises Performance: Evidence from a quasi-experiment in Nigeria. Available at SSRN 4405172. 10.2139/ssrn.4405172 . Jessen, J., & Kluve, J. (2021). The effectiveness of interventions to reduce informality in low-and middle-income countries. World Development , 138 , 105256. Lapeyre, F., & Lemaître, A. (2014). Politiques publiques et pratiques de l'économie informelle en Afrique subsaharienne. Politiques publiques et pratiques de l'économie informelle en Afrique subsaharienne , 1-292. La Porta, R., & Shleifer, A. (2014). Informality and Development. Journal of Economic Perspectives , 28 (3), 109–126. 10.1257/jep.28.3.109 . Lay, J., & Tafese, T. (2020). Formalization and productivity: Firm-level evidence from Viet Nam (No. 2020/164). WIDER Working Paper . Le, H. Q., Vu, T. P. L., Do, V. P. A., & Do, A. D. (2022). The enduring effect of formalization on firm-level corruption in Vietnam: The mediating role of internal control. International Review of Economics & Finance , 82 , 364–373. 10.1016/j.iref.2021.11.031 . Little, R. J., & Rubin, D. B. (2000). Causal effects in clinical and epidemiological studies via potential outcomes: concepts and analytical approaches. Annual review of public health , 21 (1), 121–145. Kanbur, R. (2017). Informality: Causes, consequences and policy responses. Review of Development Economics , 21 (4), 939–961. Kiaga, A., & Leung, V. (2020). The transition from the informal to the formal economy in Africa. Global Employment Policy Review, Background Paper , 2 . Maloney, W. F. (2004). Informality Revisited. World Development , 32 (7), 1159–1178. 10.1016/j.worlddev.2004.04.008 . McKenzie, D., & Sakho, Y. S. (2010). Does it pay firms to register for taxes? The impact of formality on firm profitability. Journal of Development Economics , 91 (1), 15–24. 10.1016/j.jdeveco.2009.07.006 . Nelson, E. G., & De Bruijn, E. J. (2005). The voluntary formalization of enterprises in a developing economy—the case of Tanzania. Journal of International Development: The Journal of the Development Studies Association , 17 (4), 575–593. 10.1002/jid.1209 . Nguyen, T., Verreynne, M. L., & Steen, J. (2014). Drivers of firm formalization in Vietnam: an attention theory explanation. Entrepreneurship & Regional Development , 26 (7–8), 574–593. 10.1080/08985626.2014.947227 . North, D. C. (1990). Institutions institutional Change and Economic Performance . Cambridge University Press Cambridge. Oltra, M. J., Flor, M. L., & Alfaro, J. A. (2018). Open innovation and firm performance: The role of organizational mechanisms. Business Process Management Journal , 24 (3), 814–836. Piza, C. (2018). Out of the Shadows? Revisiting the impact of the Brazilian SIMPLES program on firms’ formalization rates. Journal of Development Economics , 134 , 125–132. Sajons, G. B. (2020). Estimating the causal effect of measured endogenous variables: A tutorial on experimentally randomized instrumental variables. The Leadership Quarterly , 31 (5), 101348. Shamsuzzoha, & Tanaka, M. (2021). Formalization of manufacturing firms in Bangladesh. Review of Development Economics , 25 (3), 1668–1694. Tran, T. B., & La, H. A. (2020). Why Do Household Businesses Stay Informal? Micro, Small, and Medium Enterprises in Vietnam , 134–157. 10.13140/RG.2.2.21843.50729 . Ullah, S., Zaefarian, G., & Ullah, F. (2021). How to use instrumental variables in addressing endogeneity? A step-by-step procedure for non-specialists. Industrial Marketing Management , 96 , A1–A6. Ulyssea, G. (2020). Informality: Causes and consequences for development. Annual Review of Economics , 12 , 525–546. Weitzman, M. L. (1974). Free access vs. private ownership as alternative systems for managing common property. Journal of economic Theory , 8 (2), 225–234. 10.1016/0022-0531(74)90136-6 . West, S. G., Duan, N., Pequegnat, W., Gaist, P., Des Jarlais, D. C., Holtgrave, D., & Mullen, P. D. (2008). Alternatives to the randomized controlled trial. American journal of public health , 98 (8), 1359–1366. Xheneti, M., Madden, A., & Thapa Karki, S. (2019). Value of formalization for women entrepreneurs in developing contexts: A review and research agenda. International Journal of Management Reviews , 21 (1), 3–23. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-3846645","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":269130698,"identity":"34ea3bea-2cab-4d24-bfb1-f58050b35aa5","order_by":0,"name":"MD Abdul Bari","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA5ElEQVRIiWNgGAWjYDACZuaGAxAWGwPDBxDFTlALI0IL4wwQxUzQGsYGBpgWZh6wIQQ0mLMzNh66wWCTJ+/AliZt82ubPB8zA+OHjzm4tVg2MzYczmFIKzY8wHZMOrfvtmEbMwOz5MxtuLUYHAZrOZy4sYG9TTq35zYjUAsbMy9hLf8hWix7btsTq+VA4nwGoMMYftxOJFKLQXLiBma2ZMvehtvJbcyMzfj9cv7w4c85FXaJ89vbDG/8+HPbdn5788EPH/FogWoEWQekGdtAPHhMEQDyYHV/iFM8CkbBKBgFIwsAAGNXThf+kvtIAAAAAElFTkSuQmCC","orcid":"https://orcid.org/0000-0002-2835-4324","institution":"Hiroshima University: Hiroshima Daigaku","correspondingAuthor":true,"prefix":"","firstName":"MD","middleName":"Abdul","lastName":"Bari","suffix":""},{"id":269130699,"identity":"82453694-1623-475d-9d8f-ba1a2d1e97ea","order_by":1,"name":"Arifuzzaman Khan","email":"","orcid":"","institution":"Indian Institute of Technology Indore","correspondingAuthor":false,"prefix":"","firstName":"Arifuzzaman","middleName":"","lastName":"Khan","suffix":""},{"id":269130700,"identity":"d1339ada-7c73-49f2-bad7-d90a35a84a0a","order_by":2,"name":"Ghulam Dastgir Khan","email":"","orcid":"","institution":"Hiroshima University: Hiroshima Daigaku","correspondingAuthor":false,"prefix":"","firstName":"Ghulam","middleName":"Dastgir","lastName":"Khan","suffix":""},{"id":269130701,"identity":"303aad29-704c-405a-b1dc-d3628a008381","order_by":3,"name":"Yuichiro Yoshida","email":"","orcid":"","institution":"Hiroshima University: Hiroshima Daigaku","correspondingAuthor":false,"prefix":"","firstName":"Yuichiro","middleName":"","lastName":"Yoshida","suffix":""}],"badges":[],"createdAt":"2024-01-08 23:50:46","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-3846645/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-3846645/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":50327305,"identity":"4e784022-9fb6-48bb-b162-a7f35f8d1550","added_by":"auto","created_at":"2024-01-29 20:39:38","extension":"png","order_by":1,"title":"Figure 1","display":"","copyAsset":false,"role":"figure","size":106741,"visible":true,"origin":"","legend":"\u003cp\u003eComparison of Profit (Malawian pound) between Informal and Formalized Firms\u003c/p\u003e","description":"","filename":"1.png","url":"https://assets-eu.researchsquare.com/files/rs-3846645/v1/da219ecf24764a88a3926642.png"},{"id":50327306,"identity":"78221c3f-1804-4d8e-b0a0-7c963b6879ff","added_by":"auto","created_at":"2024-01-29 20:39:38","extension":"png","order_by":2,"title":"Figure 2","display":"","copyAsset":false,"role":"figure","size":100186,"visible":true,"origin":"","legend":"\u003cp\u003eComparison of Revenue (Malawian pound) between Informal and Formalized Firms\u003c/p\u003e","description":"","filename":"2.png","url":"https://assets-eu.researchsquare.com/files/rs-3846645/v1/a3f297e0438a5c1e01a554d0.png"},{"id":55207123,"identity":"7b510178-3409-4ecf-88db-c3cb267a61c3","added_by":"auto","created_at":"2024-04-24 04:55:56","extension":"pdf","order_by":0,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":518412,"visible":true,"origin":"","legend":"","description":"","filename":"manuscript.pdf","url":"https://assets-eu.researchsquare.com/files/rs-3846645/v1/a1c26b83-3ae3-49ca-8d64-e32f1a34ec7a.pdf"}],"financialInterests":"","formattedTitle":"Navigating Growth: A Formalized Approach to Small Firm Revenue and Profit Enhancement","fulltext":[{"header":"1. Introduction","content":"\u003cdiv id=\"Sec2\" class=\"Section2\"\u003e \u003ch2\u003e1.1 Background:\u003c/h2\u003e \u003cp\u003eThe concept of formalization has become a pivotal policy tool aimed at linking informal firms with governmental established economic frameworks for a long time (Gallien \u0026amp; Boogaard, \u003cspan citationid=\"CR24\" class=\"CitationRef\"\u003e2023\u003c/span\u003e). In developing economies, majority of people depends on informal economy as their income comes either from farming or from small unregistered firms (Blades et al., \u003cspan citationid=\"CR9\" class=\"CitationRef\"\u003e2011\u003c/span\u003e). Informal economy offers employment for more than two billion people of the global economy (Dell'Anno, \u003cspan citationid=\"CR18\" class=\"CitationRef\"\u003e2022\u003c/span\u003e) and around 40% of total economic activity is conducted under informal firms in the poorest country (Campos et al.,2023). As a result, Governments in developing countries often have strong motivation to formalize ever-growing informal firms to ensure implementation of policy initiatives, laws, taxes and information management (Nelson \u0026amp; Bruijn, 2004). Formalization is often associated with more profit, customer base, access to public goods like electricity and energy, and finally formalization protects from corruption (Tran \u0026amp; La, \u003cspan citationid=\"CR44\" class=\"CitationRef\"\u003e2020\u003c/span\u003e; McKenzie \u0026amp; Sakho, \u003cspan citationid=\"CR36\" class=\"CitationRef\"\u003e2010\u003c/span\u003e). Moreover, Sustainable Development Goal (SDG) 8 seeks to formulate comprehensive policies to create decent jobs, encouraging the formalization and expansion of informal firm by facilitating access to financial services (Kiaga \u0026amp; Leung, \u003cspan citationid=\"CR34\" class=\"CitationRef\"\u003e2020\u003c/span\u003e). Whereas formalization is supposed to increase welfare for small firms but yet informality is deep rooted in contextual complexity and the socio-political dynamics based on power structures (Gallien \u0026amp; Boogaard, \u003cspan citationid=\"CR24\" class=\"CitationRef\"\u003e2023\u003c/span\u003e). Thus to examine whether formalization improves the earnings of small firms is a crucial policy question. This study aims at examining the impact of the impact of formalization on revenue and profit of informal small firms using a rigorous causal identification.\u003c/p\u003e \u003cp\u003eIn African countries like Malawi, 93 per cent of the firms remain unregistered with the Government (Campos et al., \u003cspan citationid=\"CR12\" class=\"CitationRef\"\u003e2018\u003c/span\u003e). Malawian government wants to motivate informal firms to be formalized to implement their policies. Malawi is selected as case study of developing countries where formalization process is hard to implement. This research highlights whether formalization can bring about welfare for small firms. The informal sector consists of small and medium enterprises involved in economic activities outside of government regulation or taxation. Informal firms have less access to government supported programs than formalized firms, and may even actively avoid accessing such programs to avoid taxation and regulation (Nguyen et al., \u003cspan citationid=\"CR38\" class=\"CitationRef\"\u003e2014\u003c/span\u003e). Formalization can be defined a process through which an organization comes under the rules, laws, policies and strategies formulated by the Government. Definition of formalization is relative one and this study considers having business registration and a business account as the eligibility of being formalization.\u003c/p\u003e \u003cp\u003eFirms choose to be formal so the impact evaluation of formalization suffers for self-selection bias and casual inference requires addressing the bias. The present study applies a randomized encouragement design to examine causal impact of formalization using instrumental variable estimation. Randomized Encouragement Design addresses endogeneity bias using instrumental variable (Sajons, \u003cspan citationid=\"CR42\" class=\"CitationRef\"\u003e2020\u003c/span\u003e). The instrumental variable estimation addresses limitation of ITT analysis as it captures the average treatment effect of the compliers (Angrist et al., \u003cspan citationid=\"CR3\" class=\"CitationRef\"\u003e1996\u003c/span\u003e). This study uses dataset prepared by Campos et al. (\u003cspan citationid=\"CR12\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) who conducted Randomized Control Trial to examine different ways to formalize small firms in Malawi. Campos et al. (\u003cspan citationid=\"CR13\" class=\"CitationRef\"\u003e2023\u003c/span\u003e) examined the impact of Offer for cost-free business registration, coupled with a bank account opening information session as one of the treatment variables and formalization as one of the outcome variables in their study. In contrast, this study considers the offer for cost-free business registration, coupled with a bank account opening information session as an instrumental variable and formalization as the treatment variable. The offer for cost-free business registration, coupled with a bank account opening information session, serves as an instrumental variable or randomized encouragement to estimate the local average treatment effect of formalization. Instrumental variables estimation mitigates confounding by utilizing a valid instrumental variable that must be random, relevant and exclusively restricted (Baiocchi et al., \u003cspan citationid=\"CR5\" class=\"CitationRef\"\u003e2014\u003c/span\u003e). Present study has two objectives. Firstly, this study aims to examine the causal impact of formalization on small firm profit and revenue. Secondly, this study aims to explore heterogeneous impact of formalization on small firm profit and revenue. This study has a policy implication for exploring the relevance of motivating formalization of small informal firms, considering heterogeneity issues.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec3\" class=\"Section2\"\u003e \u003ch2\u003e1.2 Theoretical Framework\u003c/h2\u003e \u003cp\u003eThe theoretical underpinning of formalization presents diverse perspectives; each perspective offers unique insights into the motivations and impediments surrounding the formalization process. From the legalistic perspective (Lapeyre \u0026amp; Lema\u0026icirc;tre, \u003cspan citationid=\"CR28\" class=\"CitationRef\"\u003e2014\u003c/span\u003e), issues arise from inflexible formal sectors and a plethora of taxes, prompting calls for legislative modifications aligned with economic conditions whereas the neoliberal viewpoint (De soto, \u003cspan citationid=\"CR17\" class=\"CitationRef\"\u003e1989\u003c/span\u003e) emphasizes the role of government interference and cumbersome regulations as drivers for informal sector operation, suggesting that a streamlined legislative framework can create conducive environment for formalization. Further, the structuralist perspective (Lapeyre \u0026amp; Lema\u0026icirc;tre, \u003cspan citationid=\"CR28\" class=\"CitationRef\"\u003e2014\u003c/span\u003e) underscores the need for robust state regulations and organizations, while the institutionalist perspective (North, \u003cspan citationid=\"CR39\" class=\"CitationRef\"\u003e1990\u003c/span\u003e) focuses on overcoming institutional limitations through governmental intervention and flexible laws. Moreover, the neoclassical microeconomic approach (Bacchetta et al., \u003cspan citationid=\"CR4\" class=\"CitationRef\"\u003e2009\u003c/span\u003e) posits that excessive laws and administrative constraints contribute to the emergence of the informal sector. To counter this, incentives that align with individual achievements and projected earnings are recommended. Theoretical models, including the Exclusion Model (De Soto, \u003cspan citationid=\"CR16\" class=\"CitationRef\"\u003e2003\u003c/span\u003e and \u003cspan citationid=\"CR15\" class=\"CitationRef\"\u003e1990\u003c/span\u003e), Rational Exit Model (Maloney, \u003cspan citationid=\"CR35\" class=\"CitationRef\"\u003e2004\u003c/span\u003e), Parasite Model (Baily et al., \u003cspan citationid=\"CR6\" class=\"CitationRef\"\u003e2006\u003c/span\u003e; Farrell, \u003cspan citationid=\"CR21\" class=\"CitationRef\"\u003e2006\u003c/span\u003e), and Dual Economy Model (La Porta and Shleifer, \u003cspan citationid=\"CR29\" class=\"CitationRef\"\u003e2014\u003c/span\u003e), further enrich our understanding, offering frameworks to analyze the complexities surrounding formalization decisions.\u003c/p\u003e \u003cp\u003eEmpirical evidence and policy interventions are explored through various lenses, such as the exclusion model policies, rational exit model policies, and parasite model policies. Insights from these studies reveal the intricate nature of the formalization process, emphasizing the nuanced impact of diverse policy interventions on informal businesses. Challenges such as unobserved heterogeneity, endogeneity concerns, and institutional variations across countries are integral aspects of the impact evaluation of formalization. Survival-oriented and growth-oriented informal activities, differences in responsiveness to policies, and variations in regulatory environments contribute to the complexity of formalization dynamics. By addressing these challenges, the present study aims to offer a comprehensive understanding of the factors influencing formalization in the specific context of small informal firms in Malawi.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec4\" class=\"Section2\"\u003e \u003ch2\u003e1.3 Literature Review:\u003c/h2\u003e \u003cp\u003eA number of previous studies examined different perspectives on formalization of small firm. Most of the studies explored only correlation between formalization and firm\u0026rsquo;s welfare issues. Lay and Tafese (\u003cspan citationid=\"CR30\" class=\"CitationRef\"\u003e2020\u003c/span\u003e) explored positive correlation between formalization and firm\u0026rsquo;s productivity, whereas Berkel and Tarp (\u003cspan citationid=\"CR7\" class=\"CitationRef\"\u003e2022\u003c/span\u003e) failed to find any significant correlation between formalization and performance of firms. Shamsuzzoha and Tanaka (\u003cspan citationid=\"CR43\" class=\"CitationRef\"\u003e2021\u003c/span\u003e) explored positive correlation between formalization and performance of manufacturing firms. Further, Le et al., (\u003cspan citationid=\"CR31\" class=\"CitationRef\"\u003e2022\u003c/span\u003e) examined a negative correlation between formalization and bribing. Further, Boly (\u003cspan citationid=\"CR10\" class=\"CitationRef\"\u003e2020\u003c/span\u003e) examined formalization of small firms on tax payment. Kanbur (2019) explored causes and consequences of informality of firms using qualitative study. Similarly, Ulyssea et al., (2020) explored causes and consequences of informality. In addition, Oltra et al., (\u003cspan citationid=\"CR40\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) examined formalization as a moderating factor to induce innovative practices. A number of studies conducted literature review to examine how diverse studies contributed to examine issues related to formality. Floridi et al., (\u003cspan citationid=\"CR22\" class=\"CitationRef\"\u003e2020\u003c/span\u003e) conducted systematic literature review to examine cost and benefit of formalization. Further, Xheneti et al., (2018) conducted literature review to examine significance of formalization for woman entrepreneurs. Thus there remains a scope to contribute to the literature through estimating causal impact of formalization.\u003c/p\u003e \u003cp\u003eFew studies explored the ways to promote formalization. Using experimental design, De Giorgi et al., (\u003cspan citationid=\"CR20\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) explored the firm visit induce formalization whereas Campos et al. (\u003cspan citationid=\"CR12\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) who conducted Randomized Control Trial to examine different ways to formalize small firms in Malawi. Moreover, Piza (\u003cspan citationid=\"CR41\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) examined tax simplification program in Brazil has no impact on the rate of formalization.\u003c/p\u003e \u003cp\u003eSome studies attempted to examine causal impact of formalization but the findings are not conclusive on whether formalization has positive, negative or no impact on firm\u0026rsquo;s welfare. De Mel et al., (\u003cspan citationid=\"CR19\" class=\"CitationRef\"\u003e2013\u003c/span\u003e) examined the impact formalization of informal firms on their profit using Intention to Treat (ITT) analysis. Similarly, Benhassine et al., (\u003cspan citationid=\"CR8\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) used ITT analysis and found that formalization has no impact on sale or profit of firms. However, ITT estimates only the impact of treatment assignment in place of treatment receipt. In other words, ITT analysis is free from selection bias because of random treatment assignment, but ITT is an inaccurate measure of the impact of the treatment itself (Little \u0026amp; Rubin, \u003cspan citationid=\"CR32\" class=\"CitationRef\"\u003e2000\u003c/span\u003e). McKenzie and Sakho (\u003cspan citationid=\"CR36\" class=\"CitationRef\"\u003e2010\u003c/span\u003e) estimated the impact of tax registration as an indicator of formalization using instrumental variable, proximity to the tax office. Similarly, Ali and Marouani (2020) applied distance to the tax office as an instrumental variable. However, proximity to the tax office fails as an instrumental variable because it does not fulfill exogeneity condition as some firms self-select to reside near tax office or city center where a tax office is located. Further, proximity to the tax office does not satisfy exclusion restriction as proximity to tax office can have direct impact on welfare of a firm. Present study contributes to the existing literature in two ways. Firstly, this study aims to examine the causal impact of formalization on small firm profit and revenue, aiming to ascertain whether formalization has positive, negative or no impact on firm\u0026rsquo;s welfare. Secondly, this study examines heterogeneous impact of formalization on small firm profit and revenue as heterogeneity can change direction of the impact of any intervention.\u003c/p\u003e \u003cp\u003eSection \u003cspan refid=\"Sec5\" class=\"InternalRef\"\u003e2\u003c/span\u003e includes consists of materials and method. Section \u003cspan refid=\"Sec9\" class=\"InternalRef\"\u003e3\u003c/span\u003e includes results and analysis followed by discussion and conclusion in Section \u003cspan refid=\"Sec13\" class=\"InternalRef\"\u003e4\u003c/span\u003e.\u003c/p\u003e \u003c/div\u003e"},{"header":"2. Materials and Method","content":"\u003cdiv id=\"Sec6\" class=\"Section2\"\u003e\n \u003ch2\u003e2.1 Data Source\u003c/h2\u003e\n \u003cp\u003eThis study uses the dataset prepared by Campos et al. (\u003cspan class=\"CitationRef\"\u003e2018\u003c/span\u003e) with 3002 informal micro and small enterprises from urban Lilongwe and Blantyre, the major commercial cities in Malawi. To address gender disparities, female-owned enterprises are oversampled because of potential barriers to formalization and their smaller size on average. The stratified random sampling method was used to select the enterprises. This study uses 1964 small and micro enterprises of which 1207 enterprises were randomly assigned to receive Offer to cost free business registration along with bank account opening information session, whereas 757 enterprises remain in the control group. 1038 enterprises are excluded from this study because the excluded enterprises received different treatment which will hamper to obtain the causal impact of formalization as defined in this study. The baseline survey was conducted between December 2011 and April 2012. The second data source comprised of the baseline and four follow-up surveys. The offer and information session took place from June 2012 to September 2012, followed by surveys conducted approximately 4, 16, 28, and 35 months after the encouragement to formalize. This study considers the end line data after 35 months.\u003c/p\u003e\n \u003cp\u003eThe business registration process in Malawi involves completing the Application for Registration and submitting it with one passport photo or a copy of the National ID card to the Registrar General\u0026apos;s office. The initial cost for registering as a sole trader or in partnership was MWK 200 or $1.30, which was later increased to MWK 2000 in mid-2012 ($8 in 2012 and $4 in 2013) and the official processing time is 14 days, though practical experiences vary, ranging from one day to two months, with the option of expedited processing through intermediaries at a higher cost (Campos et al., \u003cspan class=\"CitationRef\"\u003e2023\u003c/span\u003e).\u003c/p\u003e\n\u003c/div\u003e\n\u003cdiv id=\"Sec7\" class=\"Section2\"\u003e\n \u003ch2\u003e2.2 Summary Statistics:\u003c/h2\u003e\n \u003cp\u003eTable\u0026nbsp;\u003cspan class=\"InternalRef\"\u003e1\u003c/span\u003e reports the summary statistics of the variables of the firms based on formality status. Female owners are more in the formal firms (37%) than informal firms (42%). The average age of the formal firm owners is 34 years, whereas the average age of informal firm owners is 33.34 years. 92% and 5% owners of the formal firms are literate and higher educated respectively, whereas 90% and 6% owners of the informal firms are literate and higher educated respectively. 8%, 72% and 20% of the formal firms are of manufacturing, retail and service respectively, whereas 6%, 70% and 24% of the informal firms are of manufacturing, retail and service respectively. The average age of the informal firms is 8.21 years, whereas the average age of formal firms is 7.78 years. 37% of formal firms have own space, while 32% of informal firms have own space. Average revenue and profit of the formal firms are 446609.96 Malawian pound (1 USD\u0026thinsp;=\u0026thinsp;1687.54 Malawian pound) and 97641.29 Malawian pound respectively. On the other hand, average revenue and profit of the informal firms are 309114.10 Malawian pound and 70269.18 Malawian pounds respectively.\u003c/p\u003e\n \u003cdiv class=\"gridtable\"\u003e\n \u003ctable id=\"Tab1\" border=\"1\"\u003e\n \u003ccaption\u003e\n \u003cdiv class=\"CaptionNumber\"\u003eTable 1\u003c/div\u003e\n \u003cdiv class=\"CaptionContent\"\u003e\n \u003cp\u003eSummary statistics: Based on Formality Status \u003cspan class=\"Underline\"\u003eControl: Informal Firms\u003c/span\u003e\u003c/p\u003e\n \u003c/div\u003e\n \u003c/caption\u003e\n \u003cthead\u003e\n \u003ctr\u003e\n \u003cth align=\"left\"\u003e\n \u003cp\u003e1\u0026thinsp;=\u0026thinsp;Owner is Female\u003c/p\u003e\n \u003c/th\u003e\n \u003cth align=\"left\"\u003e\n \u003cp\u003e0.42\u003c/p\u003e\n \u003c/th\u003e\n \u003cth align=\"left\"\u003e\n \u003cp\u003e0.49\u003c/p\u003e\n \u003c/th\u003e\n \u003cth align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/th\u003e\n \u003cth align=\"left\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/th\u003e\n \u003c/tr\u003e\n \u003c/thead\u003e\n \u003ctbody\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003eOwner age\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e33.34\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e9.29\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e14.00\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e78\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003e1\u0026thinsp;=\u0026thinsp;Literate\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.90\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.30\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003e1\u0026thinsp;=\u0026thinsp;Higher education\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.05\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.22\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003e1\u0026thinsp;=\u0026thinsp;Manufacturing\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.06\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.24\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003e1\u0026thinsp;=\u0026thinsp;Retail\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.70\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.46\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003e1\u0026thinsp;=\u0026thinsp;Services\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.24\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.42\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003eFirm Age (Years)\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e7.78\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e7.28\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e49\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003e1\u0026thinsp;=\u0026thinsp;Owns space\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.32\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e0.47\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e1\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003eRevenue last month\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e309114.10\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e534258.44\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e4500000\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003ctr\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e\u003cstrong\u003eProfit last month\u003c/strong\u003e\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e70269.18\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e93261.65\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"left\"\u003e\n \u003cp\u003e0\u003c/p\u003e\n \u003c/td\u003e\n \u003ctd align=\"char\"\u003e\n \u003cp\u003e725000\u003c/p\u003e\n \u003c/td\u003e\n \u003c/tr\u003e\n \u003c/tbody\u003e\n \u003c/table\u003e\n \u003c/div\u003e\n\u003c/div\u003e\n\u003cdiv id=\"Sec8\" class=\"Section2\"\u003e\n \u003ch2\u003e2.3 Identification Strategy:\u003c/h2\u003e\n \u003cp\u003eFormalization is an endogenous variable because a firm selects to be formalized. Thus to examine the impact of formalization needs to deal with self-selection bias. Self-selection creates endogeneity problem that occurs when a treatment variable is correlated to the error terms (Ullah et al., \u003cspan class=\"CitationRef\"\u003e2021\u003c/span\u003e). This study applies Randomized Encouragement Design as a robust identification to estimate the causal impact (West et al., \u003cspan class=\"CitationRef\"\u003e2008\u003c/span\u003e) as an alternative to Randomized control trial, the gold standard. Randomized Encouragement Design utilizes instrumental variable (IV) approach that addresses endogeneity issue if conditions of IV are satisfied (Angrist et al., \u003cspan class=\"CitationRef\"\u003e1996\u003c/span\u003e). Instrumental variable explores causal inferences on the impact of a treatment on an outcome (Burgess et al., \u003cspan class=\"CitationRef\"\u003e2017\u003c/span\u003e). Offer to cost free business registration along with bank account opening information session is considered as an instrumental variable or randomized encouragement to estimate the local average treatment effect of formalization. Offer to cost free business registration along with bank account opening information session fulfills the three conditions of instrumental variable setting. As the offer and session are randomized so fulfill exogenity condition. Then, the offer and session has direct impact on formalization process thus they fulfill relevance condition. Finally, the offer and session fulfill exclusion restriction condition, having no direct impact on revenue or profit of firms.\u003c/p\u003e\n \u003cp\u003eAs an instrumental variable setting, this study has three types of firms: compliers, never takers and always takers. Firms are compliers if its formalization depends on the offer and the information session. In other words, complier firms become formalized if they receive offer and the information session whereas complier firms remain informal if they do not receive offer and the information session. Then the Always Taker firms are those that formalize whether they receive offer and the information session or not. In contrast, the firms are never takers if they remain informal whether they receive offer and the information session or not.\u003c/p\u003e\n \u003cp\u003eTwo stage least square is used in Randomized Encouragement Design to estimate local average treatment effect (LATE). The first stage estimation uses the following equation:\u003c/p\u003e\n \u003cp\u003e\u003cstrong\u003eEquation for First stage Estimation\u003c/strong\u003e:\u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({F}_{i}={a}_{0}+\\pi {E}_{i}+{{\\mu }}_{i}\\)\u003c/span\u003e\u003c/span\u003e\u003c/p\u003e\n \u003cp\u003eIn this case, \u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({F}_{i}\\)\u003c/span\u003e\u003c/span\u003e is a dummy variable of Formalization Status, taking the value 1 if the firm has business registration and a business account. \u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({E}_{i}\\)\u003c/span\u003e\u003c/span\u003e is the IV dummy equating 1 if a firm is offered cost free business registration along with bank account opening information session.\u003c/p\u003e\n \u003cp\u003eFrom the first stage predicted \u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({F}_{i}\\)\u003c/span\u003e\u003c/span\u003e is estimated and after that the below second stage equation is used to measure local average treatment effect:\u003c/p\u003e\n \u003cp\u003e\u003cstrong\u003eEquation for Second StageEstimation\u003c/strong\u003e:\u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({ R}_{i}={\\beta }_{0}+{\\rho }_{c}{\\widehat{F}}_{i}+{\\epsilon }_{i}\\)\u003c/span\u003e\u003c/span\u003e\u003c/p\u003e\n \u003cp\u003e\u003cspan class=\"InlineEquation\"\u003e\u0026nbsp;\u003cspan class=\"mathinline\"\u003e\\({R}_{i}\\)\u003c/span\u003e\u0026nbsp;\u003c/span\u003e are the outcome variables. Here, the local average treatment effects are estimated by \u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({\\rho }_{c}\\)\u003c/span\u003e\u003c/span\u003e. \u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({\\widehat{F}}_{i}\\)\u003c/span\u003e\u003c/span\u003eis the predicted formalization dummy. \u003cspan class=\"InlineEquation\"\u003e\u003cspan class=\"mathinline\"\u003e\\({\\rho }_{c}\\)\u003c/span\u003e\u003c/span\u003e is the main treatment effect of formalization and it refers to local average treatment effect of compliers.\u003c/p\u003e\n\u003c/div\u003e"},{"header":"3. Results and Analysis","content":"\u003cdiv id=\"Sec10\" class=\"Section2\"\u003e \u003ch2\u003e3.1 Main Results:\u003c/h2\u003e \u003cp\u003eTable\u0026nbsp;\u003cspan refid=\"Tab2\" class=\"InternalRef\"\u003e2\u003c/span\u003e reports that offer to cost free business registration along with bank account opening information session as instrumental variable has significant positive impact on formalization status of small firms at 1% significance level. The first stage result also affirms the relevance condition offer to cost free business registration along with bank account opening information session as instrumental variable. In other words, offer to cost free business registration along with bank account opening information session as instrumental variable increases the formalization of small firms.\u003c/p\u003e \u003cp\u003e \u003cdiv class=\"gridtable\"\u003e\u003ctable float=\"Yes\" id=\"Tab2\" border=\"1\"\u003e \u003ccaption language=\"En\"\u003e \u003cdiv class=\"CaptionNumber\"\u003eTable 2\u003c/div\u003e \u003cdiv class=\"CaptionContent\"\u003e \u003cp\u003eImpact of the Offer and Information Session on Formalization\u003c/p\u003e \u003c/div\u003e \u003c/caption\u003e \u003ccolgroup cols=\"4\"\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c1\" colnum=\"1\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c2\" colnum=\"2\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c3\" colnum=\"3\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c4\" colnum=\"4\"\u003e\u003c/div\u003e \u003cthead\u003e \u003ctr\u003e \u003cth align=\"left\" colname=\"c1\"\u003e\u0026nbsp;\u003c/th\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c3\" namest=\"c2\"\u003e \u003cp\u003e(1)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colspan=\"1\" nameend=\"c4\" namest=\"c4\"\u003e\u0026nbsp;\u003c/th\u003e \u003c/tr\u003e \u003c/thead\u003e \u003ctbody\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003eVARIABLES\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c3\" namest=\"c2\"\u003e \u003cp\u003eFormalization\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"1\" nameend=\"c4\" namest=\"c4\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eInstrumental Variable\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c3\" namest=\"c2\"\u003e \u003cp\u003e0.58***\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"1\" nameend=\"c4\" namest=\"c4\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c3\" namest=\"c2\"\u003e \u003cp\u003e(0.01)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"1\" nameend=\"c4\" namest=\"c4\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"4\" nameend=\"c4\" namest=\"c1\"\u003e \u003cp\u003eStandard errors in parentheses\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e \u003cp\u003e*** p\u0026thinsp;\u0026lt;\u0026thinsp;0.01, ** p\u0026thinsp;\u0026lt;\u0026thinsp;0.05, * p\u0026thinsp;\u0026lt;\u0026thinsp;0.1\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c4\" namest=\"c3\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003c/tbody\u003e \u003c/colgroup\u003e \u003c/table\u003e\u003c/div\u003e \u003c/p\u003e \u003cp\u003eTable\u0026nbsp;\u003cspan refid=\"Tab3\" class=\"InternalRef\"\u003e3\u003c/span\u003e reports that formalization has significant positive impact on profit and revenue of small firms at 1% significance level. In other words, formalization increases profit and revenue of small firms. Table\u0026nbsp;\u003cspan refid=\"Tab2\" class=\"InternalRef\"\u003e2\u003c/span\u003e reports formalization increases profit of small firms by 22803.64 Malawian pound and revenue of small firms by 161,777.80 Malawian pound.\u003c/p\u003e \u003cp\u003e \u003cdiv class=\"gridtable\"\u003e\u003ctable float=\"Yes\" id=\"Tab3\" border=\"1\"\u003e \u003ccaption language=\"En\"\u003e \u003cdiv class=\"CaptionNumber\"\u003eTable 3\u003c/div\u003e \u003cdiv class=\"CaptionContent\"\u003e \u003cp\u003eImpact of Formalization on Profit and Revenue in Malawian pound\u003c/p\u003e \u003c/div\u003e \u003c/caption\u003e \u003ccolgroup cols=\"5\"\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c1\" colnum=\"1\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c2\" colnum=\"2\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c3\" colnum=\"3\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c4\" colnum=\"4\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c5\" colnum=\"5\"\u003e\u003c/div\u003e \u003cthead\u003e \u003ctr\u003e \u003cth align=\"left\" colname=\"c1\"\u003e\u0026nbsp;\u003c/th\u003e \u003cth align=\"left\" colname=\"c2\"\u003e \u003cp\u003e(1)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c4\" namest=\"c3\"\u003e \u003cp\u003e(2)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colspan=\"1\" nameend=\"c5\" namest=\"c5\"\u003e\u0026nbsp;\u003c/th\u003e \u003c/tr\u003e \u003c/thead\u003e \u003ctbody\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003eVARIABLES\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003eProfit\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c4\" namest=\"c3\"\u003e \u003cp\u003eRevenue\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"1\" nameend=\"c5\" namest=\"c5\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eFormalization Status (0/1)\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e22,803.64***\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c4\" namest=\"c3\"\u003e \u003cp\u003e161,777.80***\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"1\" nameend=\"c5\" namest=\"c5\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e(8,206.87)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c4\" namest=\"c3\"\u003e \u003cp\u003e(58,910.28)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"1\" nameend=\"c5\" namest=\"c5\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"5\" nameend=\"c5\" namest=\"c1\"\u003e \u003cp\u003eStandard errors in parentheses\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"3\" nameend=\"c3\" namest=\"c1\"\u003e \u003cp\u003e*** p\u0026thinsp;\u0026lt;\u0026thinsp;0.01, ** p\u0026thinsp;\u0026lt;\u0026thinsp;0.05, * p\u0026thinsp;\u0026lt;\u0026thinsp;0.1\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c5\" namest=\"c4\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003c/tbody\u003e \u003c/colgroup\u003e \u003c/table\u003e\u003c/div\u003e \u003c/p\u003e \u003cp\u003eFigure 1 demonstrates comparison of profit between formal and informal firms. The figure illustrates that profit of formal firms are comparatively higher than that of informal firms. The average profit of formal firms is 101255.66 Malawian pounds and the average profit of informal firms is 61261.51 Malawian pounds.\u003c/p\u003e \u003cp\u003e \u003c/p\u003e \u003cp\u003eFigure \u003cspan refid=\"Fig2\" class=\"InternalRef\"\u003e2\u003c/span\u003e demonstrates comparison of revenue between formal and informal firms. The figure illustrates that revenue of formal firms are comparatively higher than that of informal firms. The average revenue of formal firms is 523054.41 Malawian pounds and the average revenue of informal firms is 344326.41 Malawian pounds.\u003c/p\u003e \u003cp\u003e \u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec11\" class=\"Section2\"\u003e \u003ch2\u003e3.2 Balancing Test\u003c/h2\u003e \u003cp\u003eTable\u0026nbsp;\u003cspan refid=\"Tab4\" class=\"InternalRef\"\u003e4\u003c/span\u003e reports the balancing test of pretreatment covariates of the firms based on IV status. In other words, this table reports whether pretreatment covariates of the firms were balanced based on whether a firm received offer or not. The result shows that none of the pretreatment covariates of the firms were significantly different between those who received offer and those who did not receive offer.\u003c/p\u003e \u003cp\u003e \u003cdiv class=\"gridtable\"\u003e\u003ctable float=\"Yes\" id=\"Tab4\" border=\"1\"\u003e \u003ccaption language=\"En\"\u003e \u003cdiv class=\"CaptionNumber\"\u003eTable 4\u003c/div\u003e \u003cdiv class=\"CaptionContent\"\u003e \u003cp\u003eBalancing Test of Pretreatment Covariates\u003c/p\u003e \u003c/div\u003e \u003c/caption\u003e \u003ccolgroup cols=\"7\"\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c1\" colnum=\"1\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c2\" colnum=\"2\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c3\" colnum=\"3\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c4\" colnum=\"4\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c5\" colnum=\"5\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c6\" colnum=\"6\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c7\" colnum=\"7\"\u003e\u003c/div\u003e \u003cthead\u003e \u003ctr\u003e \u003cth align=\"left\" colname=\"c1\"\u003e \u003cp\u003eVariable\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c2\"\u003e \u003cp\u003eTreatment\u003c/p\u003e \u003cp\u003eAssigned\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c3\"\u003e\u0026nbsp;\u003c/th\u003e \u003cth align=\"left\" colname=\"c4\"\u003e \u003cp\u003eControl\u003c/p\u003e \u003cp\u003eAssigned\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c5\"\u003e\u0026nbsp;\u003c/th\u003e \u003cth align=\"left\" colname=\"c6\"\u003e \u003cp\u003eDifference\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c7\"\u003e\u0026nbsp;\u003c/th\u003e \u003c/tr\u003e \u003c/thead\u003e \u003ctbody\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003e1\u0026thinsp;=\u0026thinsp;Owner is Female\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e0.40\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[0.49]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.40\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[0.49]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e-0.01\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(0.02)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eOwner age\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e33.33\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[8.82]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e34.00\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[9.34]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e0.67\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(0.42)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003e1\u0026thinsp;=\u0026thinsp;Literate\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e0.91\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[0.29]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.91\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[0.29]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e0.00\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(0.01)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003e1\u0026thinsp;=\u0026thinsp;Higher education\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e0.05\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[0.23]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.05\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[0.22]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e-0.00\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(0.01)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eAge of firm\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e7.72\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[7.02]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e8.30\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[7.32]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e0.58*\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(0.33)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eNo Employees\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e2.05\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[1.28]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e2.01\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[1.17]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e-0.04\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(0.06)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eCapital\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e173162.48\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[490218.38]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e176145.82\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[756949.73]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e2983.34\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(28143.93)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003e1\u0026thinsp;=\u0026thinsp;Owns space\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e0.33\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[0.47]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.35\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[0.48]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e0.03\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(0.02)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eRevenue last month\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e224986.81\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[2117546.77]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e190317.86\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[712952.13]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e-34668.95\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(79658.73)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eProfit last month\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e36495.09\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e[57865.18]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e34477.68\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e[39402.95]\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e-2017.41\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e \u003cp\u003e(2389.56)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e\u003cb\u003eObservations\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e1207\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e757\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e1964\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c7\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003c/tbody\u003e \u003c/colgroup\u003e \u003c/table\u003e\u003c/div\u003e \u003c/p\u003e \u003cp\u003eNotes: Standard Deviation in square brackets. Standard Error in parenthesis. * p\u0026thinsp;\u0026lt;\u0026thinsp;0.10 ** p\u0026thinsp;\u0026lt;\u0026thinsp;0.05 *** p\u0026thinsp;\u0026lt;\u0026thinsp;0.01\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec12\" class=\"Section2\"\u003e \u003ch2\u003e3.3 Heterogeneous Impact:\u003c/h2\u003e \u003cp\u003eTable\u0026nbsp;\u003cspan refid=\"Tab5\" class=\"InternalRef\"\u003e5\u003c/span\u003e reports the heterogeneous impact of formalization based on business type. The result shows that formalization has significant positive impact on profit and revenue of only manufacturing small firms. However, impact of formalization on profit and revenue of retail and service related small firms is not statistically significant. Table\u0026nbsp;\u003cspan refid=\"Tab4\" class=\"InternalRef\"\u003e4\u003c/span\u003e reports formalization increases profit of manufacturing small firms by 27539.50 Malawian pound (1 USD\u0026thinsp;=\u0026thinsp;1,687.54 Malawian pound) and revenue of manufacturing small firms by 171352.80 Malawian pound.\u003c/p\u003e \u003cp\u003e \u003cdiv class=\"gridtable\"\u003e\u003ctable float=\"Yes\" id=\"Tab5\" border=\"1\"\u003e \u003ccaption language=\"En\"\u003e \u003cdiv class=\"CaptionNumber\"\u003eTable 5\u003c/div\u003e \u003cdiv class=\"CaptionContent\"\u003e \u003cp\u003eHeterogeneous Impact of Formalization Based on Type of Business\u003c/p\u003e \u003c/div\u003e \u003c/caption\u003e \u003ccolgroup cols=\"10\"\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c1\" colnum=\"1\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c2\" colnum=\"2\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c3\" colnum=\"3\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c4\" colnum=\"4\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c5\" colnum=\"5\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c6\" colnum=\"6\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c7\" colnum=\"7\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c8\" colnum=\"8\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c9\" colnum=\"9\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c10\" colnum=\"10\"\u003e\u003c/div\u003e \u003cthead\u003e \u003ctr\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e\u0026nbsp;\u003c/th\u003e \u003cth align=\"left\" colname=\"c3\"\u003e \u003cp\u003e(1)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c4\"\u003e \u003cp\u003e(2)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c5\"\u003e \u003cp\u003e(3)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c7\" namest=\"c6\"\u003e \u003cp\u003e(4)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c8\"\u003e \u003cp\u003e(5)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c10\" namest=\"c9\"\u003e \u003cp\u003e(6)\u003c/p\u003e \u003c/th\u003e \u003c/tr\u003e \u003c/thead\u003e \u003ctbody\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e \u003cp\u003eVARIABLES\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003eProfit\u003c/p\u003e \u003cp\u003e(Retail)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003eProfit\u003c/p\u003e \u003cp\u003e(Manufacturing)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003eProfit\u003c/p\u003e \u003cp\u003e(Service)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c7\" namest=\"c6\"\u003e \u003cp\u003eRevenue\u003c/p\u003e \u003cp\u003e(Retail)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c8\"\u003e \u003cp\u003eRevenue\u003c/p\u003e \u003cp\u003e(Manufacturing)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c10\" namest=\"c9\"\u003e \u003cp\u003eRevenue\u003c/p\u003e \u003cp\u003e(Service)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e \u003cp\u003e\u003cb\u003eFormalization Status (0/1)\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e36,461.89\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e27,539.50***\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e845.33\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c7\" namest=\"c6\"\u003e \u003cp\u003e275,114.10\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c8\"\u003e \u003cp\u003e171,352.80**\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c10\" namest=\"c9\"\u003e \u003cp\u003e70,592.53\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e(34,372.39)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e(10,091.78)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e(13,615.34)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c7\" namest=\"c6\"\u003e \u003cp\u003e(252,736.20)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c8\"\u003e \u003cp\u003e(72,980.60)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c10\" namest=\"c9\"\u003e \u003cp\u003e(93,731.79)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"8\" nameend=\"c8\" namest=\"c1\"\u003e \u003cp\u003eStandard errors in parentheses\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c10\" namest=\"c9\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"5\" nameend=\"c5\" namest=\"c1\"\u003e \u003cp\u003e*** p\u0026thinsp;\u0026lt;\u0026thinsp;0.01, ** p\u0026thinsp;\u0026lt;\u0026thinsp;0.05, * p\u0026thinsp;\u0026lt;\u0026thinsp;0.1\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"3\" nameend=\"c8\" namest=\"c6\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c10\" namest=\"c9\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003c/tbody\u003e \u003c/colgroup\u003e \u003c/table\u003e\u003c/div\u003e \u003c/p\u003e \u003cp\u003eFurthermore, Table \u003cspan refid=\"Tab6\" class=\"InternalRef\"\u003e6\u003c/span\u003e reports the heterogeneous impact of formalization based on gender of firm ownership. The result shows that formalization significantly increases profit of male owned firms and revenue of female owned firms at 5% significance level. It can be concluded that formalization improves the situation of firms irrespective of gender of the owner. The result suggests that formalization does not have gender biased impact.\u003c/p\u003e \u003cp\u003e \u003cdiv class=\"gridtable\"\u003e\u003ctable float=\"Yes\" id=\"Tab6\" border=\"1\"\u003e \u003ccaption language=\"En\"\u003e \u003cdiv class=\"CaptionNumber\"\u003eTable 6\u003c/div\u003e \u003cdiv class=\"CaptionContent\"\u003e \u003cp\u003eHeterogeneous Impact of Formalization Based on Gender of Ownership\u003c/p\u003e \u003c/div\u003e \u003c/caption\u003e \u003ccolgroup cols=\"8\"\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c1\" colnum=\"1\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c2\" colnum=\"2\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c3\" colnum=\"3\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c4\" colnum=\"4\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c5\" colnum=\"5\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c6\" colnum=\"6\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c7\" colnum=\"7\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c8\" colnum=\"8\"\u003e\u003c/div\u003e \u003cthead\u003e \u003ctr\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e\u0026nbsp;\u003c/th\u003e \u003cth align=\"left\" colname=\"c3\"\u003e \u003cp\u003e(1)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c4\"\u003e \u003cp\u003e(2)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c6\" namest=\"c5\"\u003e \u003cp\u003e(3)\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colspan=\"2\" nameend=\"c8\" namest=\"c7\"\u003e \u003cp\u003e(4)\u003c/p\u003e \u003c/th\u003e \u003c/tr\u003e \u003c/thead\u003e \u003ctbody\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e \u003cp\u003eVARIABLES\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003eProfit\u003c/p\u003e \u003cp\u003e(Female Owner)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003eProfit\u003c/p\u003e \u003cp\u003e(Male Owner)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c6\" namest=\"c5\"\u003e \u003cp\u003eRevenue\u003c/p\u003e \u003cp\u003e(Female Owner)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c8\" namest=\"c7\"\u003e \u003cp\u003eRevenue\u003c/p\u003e \u003cp\u003e(Male Owner)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e \u003cp\u003e\u003cb\u003eFormalization Status (0/1)\u003c/b\u003e\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e23,531*\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e22,717**\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c6\" namest=\"c5\"\u003e \u003cp\u003e157,663**\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c8\" namest=\"c7\"\u003e \u003cp\u003e162,317*\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c2\" namest=\"c1\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e(12,364)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e(10,644)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c6\" namest=\"c5\"\u003e \u003cp\u003e(72,062)\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c8\" namest=\"c7\"\u003e \u003cp\u003e(82,980)\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"6\" nameend=\"c6\" namest=\"c1\"\u003e \u003cp\u003eStandard errors in parentheses\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c8\" namest=\"c7\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colspan=\"4\" nameend=\"c4\" namest=\"c1\"\u003e \u003cp\u003e*** p\u0026thinsp;\u0026lt;\u0026thinsp;0.01, ** p\u0026thinsp;\u0026lt;\u0026thinsp;0.05, * p\u0026thinsp;\u0026lt;\u0026thinsp;0.1\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c6\" namest=\"c5\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colspan=\"2\" nameend=\"c8\" namest=\"c7\"\u003e\u0026nbsp;\u003c/td\u003e \u003c/tr\u003e \u003c/tbody\u003e \u003c/colgroup\u003e \u003c/table\u003e\u003c/div\u003e \u003c/p\u003e \u003c/div\u003e"},{"header":"4. Discussion and Conclusion","content":"\u003cp\u003eFormalization is argued to promote growth of a firm but the evidence of the impact of formalization remains inconclusive. This study attempts to explore the empirical evidence of the impact of formalization on revenue and profit of small firms in Malawi. Revenue and profit are considered as the major indicators of the betterment of small firms. The findings of the study affirm that formalization increases the revenue and profit of small firms. This study gives empirical evidence that formalization has significant positive impact on revenue and profit of small firms. Formalization acts in a diverse way to promote revenue and profit of small firms. One of the way is that it decreases the external pressure of being illegal as suggested by Le et al., (\u003cspan citationid=\"CR31\" class=\"CitationRef\"\u003e2022\u003c/span\u003e) exploring a negative correlation between formalization and bribing. Further, formalization helps to meet the financing requirement of the small firms as formalization helps small firms to get external financing (Le et al., \u003cspan citationid=\"CR31\" class=\"CitationRef\"\u003e2022\u003c/span\u003e). Further, Haruna (\u003cspan citationid=\"CR26\" class=\"CitationRef\"\u003e2023\u003c/span\u003e) argues that formalization promotes electricity access, usage of internet, size of firms, investment, accounting procedure, supply of product, customer coverage and competition. Further, Dada et al., (\u003cspan citationid=\"CR14\" class=\"CitationRef\"\u003e2022\u003c/span\u003e) argue that formalization helps to reduce the environmental degradation caused by informal firms like informal firm involved in metal works, obsolete vehicles, automotive repair as well as crude mining.\u003c/p\u003e \u003cp\u003eHeterogeneous impact analysis gives an interesting finding that formalization increase revenue and profit of only manufacturing small firms and formalization has no conclusive impact on revenue and profit of retail or service related small firms. Heterogeneous impact suggests that formalization helps manufacturing farms to earn more. Our finding is supported by the study of Shamsuzzoha and Tanaka (\u003cspan citationid=\"CR43\" class=\"CitationRef\"\u003e2021\u003c/span\u003e) who also explored formalization is positively correlated to productivity. The inconclusive impact of formalization on revenue and profit of retail or service related small firms can be explained as formalization opens less opportunity for retail or service firms than manufacturing firms (Shamsuzzoha \u0026amp; Tanaka, \u003cspan citationid=\"CR43\" class=\"CitationRef\"\u003e2021\u003c/span\u003e). Further, heterogeneous impact analysis based on gender of owner shows that male owned firms earn more profit whereas female owned firms earn more revenue if formalized.\u003c/p\u003e \u003cp\u003eThe intricate relationship between formalization and economic development has been a subject of significant scholarly inquiry, particularly in the context of developing economies. Within this broader landscape, this research aims to contribute to the understanding of formalization dynamics, specifically examining its impact on the revenue and profit of small informal firms in Malawi. As a nation grappling with economic challenges, Malawi serves as an illustrative case study where a substantial portion of businesses operates in the informal sector. In concluding our research endeavor, the study has illuminated various dimensions of the formalization process and its implications for small informal firms in Malawi. Through a robust methodological approach encompassing a Randomized Encouragement Design and instrumental variable estimation, we sought to navigate the complexities inherent in studying causal relationships in the context of informal economies.\u003c/p\u003e \u003cp\u003eThe theoretical foundations provided a rich tapestry of perspectives, offering a comprehensive understanding of the motivations and hindrances to formalization. As we delved into legalistic, neoliberal, structuralist, institutionalist, and neoclassical viewpoints, we found that the formalization landscape is multifaceted, requiring nuanced policy interventions tailored to the specific challenges faced by informal businesses in developing economies. The empirical evidence unveiled the intricate nature of formalization, highlighting the varied impact of different policy measures on formalization rates. From the exclusion model policies to the rational exit model policies and the parasite model policies, each approach revealed the need for a context-specific understanding of formalization dynamics. Formalization induced through policy brings large benefits than formalization induced through self-motivation, suggesting policy initiates need to be adopted to promote formalization (Floridi et al., \u003cspan citationid=\"CR23\" class=\"CitationRef\"\u003e2021\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eThe acknowledgment of challenges, including unobserved heterogeneity, endogeneity concerns, and institutional variations, underscores the need for nuanced analyses in the study of formalization. The survival-oriented and growth-oriented nature of informal activities, coupled with differences in responsiveness to policies, emphasize the need for policies that account for the diverse characteristics influencing formalization decisions. As nations grapple with the challenges and opportunities presented by informal economies, the findings of this research offer actionable insights for designing effective policies that encourage formalization and promote sustainable economic growth. In essence, this research contributes to the ongoing discourse on formalization, providing a nuanced understanding of the dynamics at play in small informal firms in Malawi. By integrating theoretical perspectives, empirical evidence, and policy implications, the study enriches general understanding of the factors shaping the formalization process and offers valuable insights for policymakers, practitioners, and researchers interested in fostering economic development and enhancing the well-being of small businesses in developing economies. This research provides a policy implication to promote formalization of informal firms through information seminars, easy and free business registration procedures, reducing payroll taxes, and subsidized registration cost (Jessen \u0026amp; Kluve, \u003cspan citationid=\"CR27\" class=\"CitationRef\"\u003e2021\u003c/span\u003e). Moreover, governments of developing economies need to design both short term and long term comprehensive strategic plans. Taxation should be relaxed for small firms to sustain them. To formalize small firms, governments of developing countries have four reasons to extend the tax base, augment access to the formal economy, reinforce the rule of law, and acquire valued economic information for policy implementation (Campos et al., \u003cspan citationid=\"CR13\" class=\"CitationRef\"\u003e2023\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eThis study has certain limitations. Firstly, the definition of formalization as a treatment variable is based on subjective judgment in the present study. Secondly, the study estimates only average treatment effect of the compliers. Thirdly, the spillover effect cannot be examined because of the data unavailability. Future research needs to be conducted to examine the impact of formalization more comprehensively.\u003c/p\u003e"},{"header":"Declarations","content":"\u003cp\u003e\u003cstrong\u003eCompeting Interests: \u003c/strong\u003eThe authors declare no competing interests.\u003c/p\u003e"},{"header":"References","content":"\u003col\u003e\u003cli\u003e\u003cspan\u003eAkerlof, G. A., \u0026amp; Kranton, R. E. (2008). Identity, supervision, and work groups. \u003cem\u003eAmerican Economic Review\u003c/em\u003e, \u003cem\u003e98\u003c/em\u003e(2), 212\u0026ndash;217. \u003cspan class=\"ExternalRef\"\u003e\u003cspan class=\"RefSource\"\u003e10.1257/aer.98.2.212\u003c/span\u003e\u003cspan address=\"10.1257/aer.98.2.212\" targettype=\"DOI\" class=\"RefTarget\"\u003e\u003c/span\u003e\u003c/span\u003e.\u003c/span\u003e\u003c/li\u003e \u003cli\u003e\u003cspan\u003eAli, N., \u0026amp; Marouani, M. A. 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Value of formalization for women entrepreneurs in developing contexts: A review and research agenda. \u003cem\u003eInternational Journal of Management Reviews\u003c/em\u003e, \u003cem\u003e21\u003c/em\u003e(1), 3\u0026ndash;23.\u003c/span\u003e\u003c/li\u003e\u003c/ol\u003e"}],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":true,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":false,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":false,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Formalization, Informal Firms, Revenue, Profit, Heterogeneous Impact","lastPublishedDoi":"10.21203/rs.3.rs-3846645/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-3846645/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eGovernments often have strong motivation to formalize ever-growing informal firms. However, whether formalization improves the earnings of small firms is a crucial policy question. Firms chose to be formal so the impact evaluation of formalization suffers for self-selection bias. This study aims at examining the impact of the impact of formalization on revenue and profit of informal small firms using Randomized Encouragement Design. Small firms in Malawi, one of the poorest countries, are considered as the units of analysis in the present study. This study uses dataset prepared by Campos et al. (\u003cspan citationid=\"CR12\" class=\"CitationRef\"\u003e2018\u003c/span\u003e) who conducted Randomized Control Trial to examine different ways to formalize small firms in Malawi. Campos et al. (\u003cspan citationid=\"CR13\" class=\"CitationRef\"\u003e2023\u003c/span\u003e) examined the impact of Offer for cost-free business registration, coupled with a bank account opening information session as one of the treatment variables and formalization as one of the outcome variables in their study. In contrast, this study considers the offer for cost-free business registration, coupled with a bank account opening information session as an instrumental variable and formalization as the treatment variable. The result shows that formalization significantly increases revenue and profit of small firms. Heterogeneous impact analysis suggests formalization helps only manufacturing farms to earn more.\u003c/p\u003e","manuscriptTitle":"Navigating Growth: A Formalized Approach to Small Firm Revenue and Profit Enhancement","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2024-01-29 20:39:33","doi":"10.21203/rs.3.rs-3846645/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"fd8ce073-7083-42ad-b44d-163e1b09ca82","owner":[],"postedDate":"January 29th, 2024","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2024-04-24T04:47:48+00:00","versionOfRecord":[],"versionCreatedAt":"2024-01-29 20:39:33","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-3846645","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-3846645","identity":"rs-3846645","version":["v1"]},"buildId":"qtupq5eGEP_6zYnWcrvyt","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}