On the Short- and Medium-Term Effects of Formalisation: Panel Evidence from Vietnam

Abstract

This paper analyses the consequences of formalisation on the performance of informal firms, using a panel dataset from Vietnam. We find that switching firms (before switching) have higher profit and value added compared to non-switching firms; suggesting heterogeneity. Becoming formal leads to an additional increase in switching firms’ profit and value added. The benefits of formalisation materialise in the short-term (one year) and persist in the longer-term (three or more years). These benefits run through various channels such as better access to powered equipment or higher business association membership; but not better access to credit.