The Impact of Formalization on Firm Productivity: An Application of the Fa ̈re-Primont Index
Main Article Content
Abstract
The study uses panel data and a two-step GMM estimation to figure out how formalization of firms affects Vietnam's total factor productivity (TFP) and its decompositions. TFP is broken down into output-oriented technical efficiency (OTE), (ii) output-oriented scale efficiency (OSE), and (iii) residual mixed efficiency based on the Faure-Primont (FP) index (RME). So, the mechanism of the formalization process can be thought of in different ways to improve corporate performance. The results show that formalization played a important role in the rise of TFP, OSE, and RME of SMEs in Vietnam. The findings imply that it is important to improve the business environment and formalization, which in turn promote productivity.
Keywords:
Färe-Primont index, formalization, productivity,SMEs.
References
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Ulyssea, G. (2020). Informality: Causes and consequences for development. Annual Review of Economics, 12, 525-546.
Vu, Q., & Tran, T. Q. (2021). Government financial support and firm productivity in Vietnam. Finance Research Letters, 40, 101667.
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581-606.
Zárate, R. D. (2022). Spatial Misallocation, Informality, and Transit Improvements: Evidence from Mexico City: The World Bank.
Bruhn, M., & McKenzie, D. (2014). Entry regulation and the formalization of microenterprises in developing countries. The World Bank Research Observer, 29(2), 186-201.
Bu, J., & Cuervo‐Cazurra, A. (2020). Informality costs: Informal entrepreneurship and innovation in emerging economies. Strategic Entrepreneurship Journal, 14(3), 329-368.
De Andrade, G. H., Bruhn, M., & McKenzie, D. (2016). A helping hand or the long arm of the law? Experimental evidence on what governments can do to formalize firms. The world bank economic review, 30(1), 24-54.
De Mel, S., McKenzie, D., & Woodruff, C. (2013). The demand for, and consequences of, formalization among informal firms in Sri Lanka. American Economic Journal: Applied Economics, 5(2), 122-150.
De Soto, H. (1989). The other path.
Fafchamps, M., McKenzie, D., Quinn, S., & Woodruff, C. (2014). Microenterprise growth and the flypaper effect: Evidence from a randomized experiment in Ghana. Journal of Development Economics, 106, 211-226.
Farrell, M. J. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society, 120(3), 253-282.
Goswami, A. G., Medvedev, D., & Olafsen, E. (2019). High-growth firms: Facts, fiction, and policy options for emerging economies: World Bank Publications.
Kim, K., & Hann, I.-H. (2019). Crowdfunding and the democratization of access to capital—An illusion? Evidence from housing prices. Information Systems Research, 30(1), 276-290.
La Porta, R., & Shleifer, A. (2014). Informality and development. Journal of Economic Perspectives, 28(3), 109-126.
Lay, J., & Tafese, T. (2020). Formalization and productivity.
McCaig, B., & Nanowski, J. (2019). Business Formalisation in Vietnam. The Journal of Development Studies, 55(5), 805-821.
McCaig, B., & Pavcnik, N. (2018). Export markets and labor allocation in a low-income country. American Economic Review, 108(7), 1899-1941.
McKenzie, D., & Woodruff, C. (2008). Experimental evidence on returns to capital and access to finance in Mexico. The world bank economic review, 22(3), 457-482.
O’Donnell, C. J. (2012). An aggregate quantity framework for measuring and decomposing productivity change. Journal of Productivity Analysis, 38, 255-272.
Perry, G. (2007). Informality: Exit and exclusion: World Bank Publications.
Rand, J., & Torm, N. (2012). The benefits of formalization: Evidence from Vietnamese manufacturing SMEs. World Development, 40(5), 983-998.
Trịnh, T. H., Thuần, P. V., Nghiêm, T. T., & Lã, P. T. (2021). Tác động của chất lượng quản trị công tới nâng cao hiệu quả hoạt động của các trường đại học và cao đẳng tại Việt Nam: Bằng chứng thực nghiệm giai đoạn 2013-2016. Tạp chí Giáo dục, 12-20.
Ulyssea, G. (2020). Informality: Causes and consequences for development. Annual Review of Economics, 12, 525-546.
Vu, Q., & Tran, T. Q. (2021). Government financial support and firm productivity in Vietnam. Finance Research Letters, 40, 101667.
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581-606.
Zárate, R. D. (2022). Spatial Misallocation, Informality, and Transit Improvements: Evidence from Mexico City: The World Bank.