WIDER Working Paper 2015/038 On the benefits of formalization: Panel evidence from Vietnam

as its first research and training centre and started work in Helsinki, Finland in 1985. The Institute undertakes applied research and policy analysis on structural changes affecting the developing and transitional economies, provides a forum for the advocacy of policies leading to robust, equitable and environmentally sustainable growth, and promotes capacity strengthening and training in the field of economic and social policy-making. Work is carried out by staff researchers and visiting scholars in Helsinki and through networks of collaborating scholars and institutions around the world. The views expressed in this publication are those of the author(s). Publication does not imply endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of any of the views expressed. Abstract: This paper examines the relationship between formalization and firm-level outcomes in Vietnam using a unique panel dataset. Results show that switching firms differ from informal non-switching firms, confirming heterogeneity. We also find that becoming formal leads to increased profits, value added, and revenue. The performance of switching firms is higher than that of informal ones, but remains lower compared to non-switching formal firms. Our results suggest that the benefits of formalization materialize in the short term and persist over time. These benefits run through access to improved equipment, larger customer base, advertising, and business association membership, but not access to credit. Acknowledgements: I would like to thank the Development Economics Research Group at the University of Copenhagen for granting access to the Vietnam data, in particular Finn Tarp; and Christina Kinghan for constructing the panel dataset. The views expressed here do not necessarily reflect those of the United Nations University. All remaining errors are mine.