Micro and small businesses prefer to remain “informal”

CEBU, Philippines - Although enterprise formalization is promoted as a tool for private sector development, most of the micro and small businesses in developing countries do not consider it as an effective strategy towards efficiency and enterprise growth, thus preferring to stay informal instead.

A report entitled “Micro and Small Enterprise Upgrading in the Philippines: The role of Entrepreneur, Enterprise, Networks and the Business Environment” cited findings and conclusions from international economic research studies on informal entrepreneurship.

This report is part of the three-country project of the Department of Competitiveness and Social Development of the German Development Institute entitled “Enterprise upgrading in Developing Countries”.

It was reported that in developing countries, informal producers contribute up to 40 percent of the national Gross Domestic Product and is believed to be increasing.

Compared with formal businesses, informal economy serves as the main provider of livelihood and jobs for the poor with “necessity” entrepreneurship being commonly observed.

Informality is a phenomenon that refers to enterprises that are not formally registered but are involved in income generation from the production of legal goods and services.

This is usually manifested by micro-entrepreneurs in developing countries in which informality rates are high among small-scale businesses.

A joint report of the International Labor Organization and the World Trade Organization also revealed that there are more than 50 percent cases of self-employment being associated with informality while working for small enterprises with less than five employees decreases this association by around 30 percent. 

However, the report cited that practicing informal entrepreneurship restricts the growth perspective of enterprises, resulting to greater level of difficulty than their formal counterparts particularly in terms of formal credit access and legal assistance from law enforcement agencies and courts.

Since they lack legal and scale counterparts that could enable them to participate in formal contracts, informal enterprises could not take advantage of business opportunities with international buyers, clients and government bodies.

In the case of formal firms, efficiency is highly evident since they could access a larger pool and variety of production factors and suppliers.

Further, it was found out that many informal entrepreneurs lack education, technical knowledge and management experience that are necessary towards growth and development.

With such constraints, informal micro and small enterprises tend to be less efficient and more slowly-growing compared than those formalized businesses.

The report then stated that minimizing the informal sector should still remain as a key priority for the government.

To do such, it recommended agencies related to business organizations to enforce printing of steps of legal procedures and business-related transactions in large format and posting of such billboards in reception areas and government offices where entrepreneurs need to go.

It is also advised to provide easy-to-understand leaflets that summarize the steps, costs and documents needed for business registration.

Such promotional tools, it added, should include the names of persons to approach, the approximate costs of the transaction, and the time frame necessary to complete the transaction should be included.

A tri-media campaign explaining the socio-economic benefits of business formalization should be created.

The government should also conduct series of trainings and seminars on how to complete compliance requirements to further orient entrepreneurs. /JOB (FREEMAN)