## Informality and Regulations: What Drives Firm Growth?

_IMF Working Papers, May 1, 2007_

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**Canonical URL:** [Informality and Regulations: What Drives Firm Growth?](https://www.imf.org/en/publications/wp/issues/2016/12/31/informality-and-regulations-what-drives-firm-growth-20666)

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## Bibliographic details
- Authors: Era Dabla-Norris, Gabriela Inchauste
- Published: May 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451866766.001

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### Summary findings
- The paper relies on a rich firm-level data set on transition economies to examine the role of informality as an important channel through which regulatory and other policy constraints affect firm growth.
- Firms reduce their formal operations with a higher tax and regulatory burden, but increase formal operations with better enforcement quality.
- Growth in formal firms is negatively affected by both tax and financing constraints, while these constraints are insignificant for growth in informal firms.
- Formal firm growth improves with better enforcement as measured by fair and impartial courts.
- Informal firm growth is constrained by organized crime, pointing to informal firms' inability to take full advantage of the legal and judicial systems.
- At the country-wide level, higher regulatory burden reduces firm growth.
- An interactive term between a country-wide measure of the rule of law and a proxy for formality suggests that better enforcement quality dampens the relatively weaker growth in formal firms.

### Firm-level impacts and mechanisms
- Regulatory and tax burden:
  - Higher tax and regulatory burden → firms reduce formal operations.
  - Higher tax and regulatory burden → negative effect on growth of formal firms.
  - For informal firms, tax and financing constraints are reported as insignificant for growth.
- Enforcement quality:
  - Better enforcement quality → firms increase formal operations.
  - Fair and impartial courts → positive effect on formal firm growth.
  - Organized crime → constrains informal firm growth.
- Financing constraints:
  - Identified as negatively affecting growth of formal firms; insignificant for informal firms.

### Country-wide institutions and interactions
- Higher regulatory burden at the country level reduces firm growth.
- Interaction: a country-wide measure of the rule of law interacted with a proxy for formality indicates better enforcement quality dampens the relatively weaker growth observed in formal firms.

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## Content in this bundle

- **Appendix I. Countries in the Sample**
  - [Appendix I. Countries in the Sample (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07112.pdf.md){rel="alternate" type="text/markdown"}
  - [Appendix I. Countries in the Sample (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07112.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/informality-and-regulations-what-drives-firm-growth-20666_