Small Firms’ Formalisation: The Stick Treatment

Firm informality is pervasive throughout the developing world, Bangladesh being no exception. The informal status of many firms substantially reduces the tax basis and therefore impacts the provision of public goods. The literature on encouraging formalisation has predominantly focused on reducing the direct costs of formalisation and has found negligible impacts of such policies. In this paper, we focus on a stick intervention, which to the best of our knowledge is the first one in a developing country setting that deals with the most direct and dominant form of informality, that is registration with the tax authority with a direct link to the country’s potential revenue base and thus public goods provision. We implement an experiment in which randomly selected firms are visited by tax representatives who deliver an official letter from the Bangladesh National Tax Authority stating that the firm is not registered and the consequential punishment if the firm fails to register. We find that the intervention increases the rate of registration among treated firms, while firms located in the same market but not treated do not seem to respond significantly. We also find that only larger revenue firms at baseline respond to the threat and register. Our findings have at least two important policy implications: i) the enforcement angle, which could be an important tool to encourage formalisation; and ii) targeting of government resources for formalisation to high-end informal firms. The effects are generally small in levels and this leaves open the question of why many firms still do not register.     

Benchmarking Tax Compliance Efficiency Among South African Retail Firms Using Stochastic Frontier Approach

Random selection of taxpayers for audit mostly nets tax compliant taxpayers. There is hence a need to adopt other methods that are efficient and and effective in performing their specific and general deterrence roles. This article uses profit efficiency benchmarking to analyze selected retail firms tax compliance risk in South Africa over the 2005–2006 period. It seeks to identify firms that should be audited because of their suspected tax compliance risk, using a stochastic frontier analysis. The profit efficiency estimates of 24 retail stores are used to rank them in terms of their performance. They are also tracked over time. Approximately, 50 percent of the firms performed better than the average profit efficiency of 0.39. The top 10 firms are significantly performing better. However, the bottom 50 percent of the retail firms performed poorly and could be targeted for tax audit.     

Minority entrepreneurs and firm performance in sub‐Saharan Africa

This study focuses on the role of entrepreneurs in the private sector in sub‐Saharan Africa. Using data from the Regional Program on Enterprise Development (RPED) and controlling for various factors, our analysis compares growth rates of indigenously owned African firms with firms owned by entrepreneurs of Asian or European descent, in Kenya, Zambia, Zimbabwe, and Tanzania. We find that after controlling for firm size and age, various entrepreneurial characteristics, and sector and country differences, minority (or non‐indigenous) entrepreneur firms start out larger and grow significantly faster than indigenously‐owned African firms. Our results are consistent with theories that argue that informational and financial networks created by minority entrepreneurs provide access to credit, information, and technology for members of these networks. We also find that within indigenously‐owned African firms, entrepreneurs with secondary and/or university education realise a higher rate of growth; access to education presumably enables indigenous African entrepreneurs to develop managerial skills that serve as a substitute for the informational and financial networks created by minority entrepreneurs.     

The Formal Divide: Customary Rights and the Allocation of Credit to Agriculture in Tanzania

It is generally held that one mechanism to enable inclusive growth in Tanzania is enabling farmers to access credit to raise productivity and incomes. The formalisation of property rights in Tanzania is being undertaken by a multiplicity of actors at great expense to donors, individuals and the government. While there have been a variety of different justifications for allocating Certificates of Customary Rights of Occupancy (CCROs) to farmers in Tanzania, perhaps the most prominent argument is that it will enable farmers to finally overcome the divide between ‘informal’ customary rights and the formal banking sector. CCROs would provide the collateral that would induce banks to lend money to small-scale farmers. As part of a six-year investigation in Manyara, Mbeya and Dodoma regions, our research team evaluated the impact of formalisation on farmers’ access to credit. The paper will present the results while pointing to the continuing institutional and market imperfections that perpetuate the formal divide.     

Multi-Agency Protocols as a Mechanism to Improve Partnerships in Public Services

This paper discusses and tries to explain the paradoxical observation that a local government reform aimed at reducing or even removing bureaucracy actually leads to more formalisation, not less. During the last 10–15 years more than 40 per cent of Norwegian municipalities have adopted an organisational model that makes the administration more disaggregated, decentralised and flat. The reform has been promoted by strong post- or even anti-bureaucratic rhetoric, arguing for increased managerial autonomy at the operational level. The basic idea is that greater autonomy will create better performance. The paradox of increased formalisation is discussed on the basis of rhetoric, unintended consequences, diagnostic problems and linguistic problems. The paper concludes by pointing out the need for a more nuanced conception of bureaucracy than the dichotomous approach of post-bureaucracy can offer. It also outlines a couple of supplementing explanations for increased formalisation.     

CONTRACTORS' EXPERIENCE OF COMPULSORY COMPETITIVE TENDERING: A CASE STUDY OF CONTRACT CLEANERS IN THE NHS

Compulsory competitive tendering (CCT) has been an important instrument of Conservative government economic policy since 1979. Its effectiveness in generating cost-effective services depends on competition to supply the service in question.
The NHS domestic market is large and, prior to the introduction of CCT, promised to be profitable for contractors. Many contract cleaners with office cleaning experience entered. In the event the costs of entry were heavy, and the profit margins of established firms were reduced. When contracts have been awarded to firms, they tended to be to those with a track record. Many firms therefore withdrew; and the few that remained have profit margins in the NHS little different from those found elsewhere. Of more than by firms with a serious interest in entry, probably no more than a handful can have come out of the experience in net profit in the first seven years.
The experience of CCT in the market for NHS domestic services has shown that a degree of competition in the market can be achieved, arguably because of the presence of direct service organizations. Competition for this market, on the other hand, can be limited by the high costs of entry.     

Informality and Profitability: Evidence from a New Firm Survey in Ecuador

This article estimates the impact of informality on profits using a new survey administered to 1,200 firms with less than 50 employees in four cities in Ecuador. The article proposes a novel definition of informality which explicitly recognises that most firms comply with some regulations but not others. Accounting for firm selection and controlling for a large set of firm, owner and location characteristics, the article finds that more formal firms tend to be more profitable and have higher output per worker. This impact operates, inter alia, through improved access to credit and higher sales through issuance of tax receipts.     

Accumulating Technology and Location Spillovers Among Firms in Taiwan's Electronics Industry

Using firm-level panel data from the Taiwanese Census of Manufactures for 1986 and 1991 in the context of a modified selection model, we focus on three activities that contribute to the productivity growth of firms in the electronics industry: research and development, direct foreign investment and exports. In particular we address the issue of whether, in addition to the direct benefits of these activities, there are spillovers to other firms within the same four-digit industry or within the same geographical county. Our empirical results indicate that while the survival and direct productivity growth effects of R&D, exports and DFI are positive and statistically significant, intra-industry and geographical spillover effects are consistently present only for the export activity. That is, a firm's expected future TFP is positively and significantly affected by being located in a county and industry with more export activity. In addition, there is some evidence that the indirect effects generated by DFI firms, in the form of location spillover benefits to other firms, are also positive and significant. Finally, the empirical results indicate that the above direct and indirect benefits of the technological activities under study accrue principally to Taiwan's small and medium enterprises, rather than its large firms.     

Releasing Constraints to Growth or Pushing on a String? Policies and Performance of Mexican Micro-Firms

Using firm-level data from Mexico, this paper investigates the firm characteristics associated with participation in credit markets, access to training, tax payments and membership in business associations. We find that firms which participate in these institutions exhibit significantly higher profits. Moreover, firms that borrow from formal or informal sources and those that pay taxes are significantly more likely to stay in business but firms that received credit exhibit lower rates of income growth. These results persist when firm characteristics that are arguably correlated with unobserved entrepreneurial ability are controlled for. Our findings suggest that the significant within-country differences in firm productivity observed in developing economies are due in part to market and government failures that limit the ability of micro-firms to reach their optimal sizes.     

A note on interregional trade in New Zealand

This paper attempts to test the hypothesis that given the presence of economies of scale which enable regions with larger firms to export more to regions with smaller firms, it is possible to rank a regions's exports according to the extent to which the scale of their production exceeds the national average. Data are utilized covering New Zealand's highly protected manufacturing sector. A rank correlation, significant at the 5 per cent level of probability, emerges between x_i and s_i in twelve of the thirteen regions considered; x_i being per capita value added in the i‐th industry divided by per capita value added in the nation for the i‐th industry and s_i being the average size of firm in the i‐th industry divided by the average size of firm in the nation for the i‐th industry. Such a result suggests that Heckscher‐Ohlin theorizing is of limited use in explaining regional trade flows.     

Business groups,financing constraints and investment: the case of India

We examine the effect of business group affiliation on corporate investment behaviour in India. More specifically, we test whether group affiliation reduces financing constraints for the affiliated firms. We use a data set containing 694 listed Indian companies for the 1989–97 period. We estimate a simple investment equation and find evidence that the investment-cash flow sensitivity is much lower for group affiliates. This suggests that business group affiliates have better access to external funds than stand-alone firms.     

Decomposing the Labour Productivity Gap between Migrant-Owned and Native-Owned Firms in Sub-Saharan Africa

Migration studies have been primarily based on the movement of individuals from developing to developed economies, with a focus on the impact of migrants on host country wages. In this study we take a different angle by exploring the labour productivity of migrant-owned firms versus native-owned firms in 20 African economies using firm-level data. We find that labour productivity is 78 per cent higher in migrant-owned firms than native-owned firms. Using the Oaxaca-Blinder decomposition method we find that structural effects account for 80 per cent of the labour productivity gap. Returns to manager education largely explain the productivity advantage of migrant-owned firms over native-owned firms. Interactions with the government, access to finance, informality, and power outages are also considerable contributors to the labour productivity gap.     

Is local authority procurement supporting SMEs? An analysis of practice in English local authorities

The UK coalition government wishes to improve the access of small- and medium-sized enterprises (SMEs) to public procurement, in recognition of their importance to the economy and for the benefits they can bring to public procurement and the wider public sector. Local government provides a significant opportunity for small firms, spending £84 billion of the total procurement spend of £230 billion. However, about two-thirds of both small businesses and local authorities think that SMEs face barriers in successfully accessing public procurement. This paper examines how councils are supporting SMEs in the procurement process by analysing 67 entry forms to the ‘Best Councils to do business with’ competition. This unique data source has provided insight into councils’ attitudes and procurement practices, and demonstrates that although a wide range of supportive actions are being employed there is considerable diversity across councils. Ambiguities and tensions in policies, between local and central government, have also emerged.     

Business Formalisation in Vietnam

We estimate the impact of business formalisation using nationally representative panel data on businesses in Vietnam. Our data allows us to observe businesses for two surveys prior to obtaining a licence and hence to control for differential trends before formalisation. We find that obtaining a licence is not associated with an increase in profits or other business outcomes such as revenue, expenses, and employment once we control for differential trends. Controlling for trends is crucial, as estimates that ignore trends consistently find a larger positive association between becoming licensed and business performance. Our results suggest that inducing more businesses to register is unlikely to bring about large-scale changes for these businesses.     

Foreign capital inflow and the output growth rate of the recipient country: One‐sector models compared

One of the main issues in the controversy about the desirability of the inflow of foreign capital in LDCs refers to the impact which this capital might have on the output growth rate of the recipient countries. In the first part of this paper we analyze the impact of foreign capital on the growth rate in the context of a savings constrained growth model with neo‐classical technology. In the second part, we study the impact of foreign capital on the growth rate under balance‐of‐payments constrained growth. Two main conclusions are: under neoclassical conditions, foreign capital will have a positive impact on the growth rate of domestic income as long as it grows at a rate higher than the product of the domestic saving rate by the profit rate required by foreign capitalists. Under balance‐of‐payments constrained growth, the growth rate of foreign capital needs to be higher than its own profit rate in order to have a positive impact on the growth rate of territorial income, if foreign trade parameters of overseas and domestic firms are identical.     

Liberalisation,Multinational Enterprises and Export Performance: Evidence from Indian Manufacturing

This article tests two empirical hypotheses: one, MNE affiliates perform distinctly better than their local counterparts in the export markets in a globalised economy, and two, the MNE affiliates have greater comparative advantages in high-tech than in low- and medium-tech industries. Tobit estimates of a large data set of Indian manufacturing firms for the late 1990s provide relatively weak support to the first hypothesis. A disaggregated industry-group-wise analysis indicates that MNE affiliates perform no better than their local counterparts in high-tech industries. Thus, even with a higher level of integration with the global economy in the 1990s India appears to have failed in attracting efficiency-seeking FDI on a significant scale, particularly in high-tech industries. R&D and efficiency of manpower emerge as two significant determinants of international competitiveness in technology-based sectors (high- and medium-high tech sectors). Imports of raw materials enhance the export competitiveness of firms in all industry groups. Finally, large firms are found to be more export oriented, implying the need for creating large flagship companies in the country.     

Evaluating differences in technological activity between transnational and domestic firms in Latin America

This study uses a sample of Latin American firms from four areas to compare the performance and technological activity of transnational to domestic firms. After accounting for scale, age and location of firm, we find few differences in either traditional methods of growth or profitability or in implementation of new technology embodied in processes or products. There are important differences in the sources of new technology. Domestic firms have a relatively higher level of internal innovative activity, whereas foreign firms rely more heavily (but not exclusively) on sources external to the subsidiary.     

Renminbi appreciation and Global Value Chains in China: exploring the linkages

China has experienced a rapid integration into Global Value Chains and a decade long appreciation of its exchange rate. However, these trends have been analysed largely in isolation from each other. In this paper, we explore the linkages between the two based on interviews with a sample of firms in Jiangsu Province. We show (1) how the distribution of the costs and benefits of exchange rate appreciation depends on the power hierarchies between firms in GVCs; (2) how exchange rate changes are important drivers of upgrading and even downgrading in GVCs; and (3) that the firm heterogeneity evident in GVCs provides additional insights into the politics of exchange rate determination in China.     

Child Labour in Indonesian Small Industries

We analyse the geographic incidence of child labour in small manufacturing firms in Indonesia at the village level. Our unique data set covers virtually all Indonesian villages and urban neighbourhoods; it allows us to distinguish between demand and supply side determinants of child labour. We show by correcting for sample selection that a number of counterintuitive results – child labour being unaffected by credit access and school proximity – are the result of an interplay between supply and demand side determinants. Credit access and school proximity reduce child labour supply, but simultaneously constitute positive location factors for firms thereby increasing the demand for child labourers. To effectively reduce child labour, growth oriented policies, such as enhancing school and credit facilities, should be complemented by policies specifically geared towards increasing school attendance.     

Transforming into Fashion Firms or Multi-Country Suppliers? Accounting for Varied Firm Trajectories in the Deindustrialising Korean Apparel Industry

This paper compares across two groups of Korean garment firms’ varied development and patterns of integration into the global economy in the deindustrialising Korean apparel industry. Although each group, both with histories as export suppliers, developed into fashion lead-firms or multi-country suppliers, current literature on firm upgrading provides little help in explaining the varied post-industrial trajectories of these firms. This paper bridges global value chains/global production networks (GVC/GPN) literature with institutionalist literature to highlight the importance of differential market embeddedness and organising logics in patterning how firms respond to changing global conditions.