The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs

SummaryBased on unique panel data consisting of both formal and informal firms, this paper uses a matched double difference approach to examine the relationship between legal status and firm level outcomes in micro, small and medium manufacturing enterprises (SMEs) in Vietnam. Controlling for determining factors and observable time-variant factors that may simultaneously influence the decision to formalize and subsequent firm performance, we find evidence that becoming officially registered leads to an increase in profits and investments, and a decrease in the use of casual labor (improved contract conditions for workers). Thus, we conclude that formalizing is beneficial both to firms and the workers in these firms.