Regulatory Reforms and Entrepreneurs’ Choices of Firm Structure: Evidence from Sub-Saharan Africa

Abstract

How do regulatory reforms lowering the upfront and ongoing barriers to registration and legal incorporation affect entrepreneurs' choices of firm structure? This study examines the effects of institutional reforms reducing the barriers to formalization on entrepreneurs' choices of firm structure. These reforms lowered the upfront barriers to formalization in terms of registration and incorporation time, fees, procedures, and the ongoing barriers to formalization, comprising labor, profit, and property taxes. The analyses employ firm-level nationally-representative samples from 36 countries in Sub-Saharan Africa over 2004-2019 comprising 13,441 informal micro, small, and medium enterprises (MSMEs) and event-history models with cohort and country fixed effects to evaluate the effects of these reforms on entrepreneurs' decisions about whether to register and legally incorporate their businesses. The findings show that reforms that reduced the upfront and ongoing formalization barriers increased entrepreneurs' registration rates and legal incorporation by between 68 and 93 percent. Reforms reducing the upfront barriers to formalization were most effective for small, high-productivity firms. In contrast, those reducing the ongoing barriers to formalization were most effective for large, high-profitability firms. These findings show that entrepreneurs' choices of firm structure depend on their institutional environments.