From Informal to Formal: An Exploration of Firm-Level Sectoral Change in El Salvador

Abstract Purpose— Enterprises in developed and developing world environments often begin life in the informal sector operating outside the purview of government oversight. Sectoral firm change, however, from the informal to the formal sector is not well studied. This article seeks to answer the following research question: “What firm-level markers help explain the movement of firms from the informal to the formal sector?” Design/methodology/approach—Data from 719 urban formal enterprises included in the 2016 El Salvador Enterprise Survey undertaken by the World Bank forms the basis of the empirical analyses. The survey questionnaire comprehensively encompasses business practices and performance and the overall business environment. Findings— Multivariate results reveal location, firm maturity, problems with land acquisition, a line of credit or active business loan, extortion by street gangs, and practices of informal competitors increase the odds of informal firms becoming formal enterprises. Lessening the odds of once informal firms moving to the formal sector include the lack of access to public utilities, visitation by tax officials, formation as a corporation, bank accounts, number of employees, and time spent focused upon government regulations. Originality/value— Contextualized within the national setting of El Salvador, the integration of informal enterprises into the formal economy and related public policy implications of informal firm regularization are discussed. JEL Classifications O17, O54 Key Words Informality, Transition to Formality, El Salvador Paper type Research paper