This paper analyzes the determinants of firms exiting the formal sector after registering at start-up. Using a unique and new dataset from four African countries (Cote d’Ivoire, Kenya, Nigeria and Senegal) with detailed information on firms that have transitioned between formal and informal status, we shed further light on the determinants of formality. We found that productivity and corruption (in terms of informal payments to public officials made by firms) significantly lead to firms going back into the informal sector even after initially registering at start-up. In the other direction, we found that higher productivity, better access to bank finance at start-up and education increase the likelihood of switching to formal status after initially being unregistered or informal at start-up. The results are robust to controlling for many relevant variables and controlling for selection.
That is one more paper that finds that corruption is one of the largest impediments to business formality, in this case in some African countries. That reason is probably more important than a reasonable amount of taxes on business in developing countries. What is important about this paper is that it is not studying what impedes firms to become formal, but rather what makes them go back to informality.
The paper, by Gajigo & Hallward-Driemeier is here.