# **1 Introduction**

Household businesses comprise the majority of firms in developing countries (Hsieh and Olken, 2014; La Porta and Shleifer, 2014).<sup>1</sup> They employ a large share of the workforce, and matter significantly to the livelihoods of households in low-income countries (Gollin, 2002, 2008; Nataraj, 2011; McCaig and Pavcnik, 2021). Their performance and dynamics are therefore key to understanding the livelihoods of poor households, generation of jobs, and aggregate labor productivity in low-income countries.

In this paper, we document novel stylized facts about entry and exit of household businesses in a developing country context. We utilize a unique tax census data disclosed by the General Department of Taxation that covers the universe of tax-registered household-owned businesses in Vietnam between January 2018 and August 2020, a period spanning the COVID-19 pandemic. The data include monthly information on (permanent) closure filings and (temporary) suspensions of household businesses across all communes in the country.<sup>2</sup> We find that tax-registered household businesses exhibit rates of entry and exit of about 5-6 percent a year. Existing estimates in the literature of the rate at which small firms die (exit) in developing countries range from as low as 3 percent per year (Frazer, 2005; Davies and Kerr, 2018) to over 30 percent annually (Fajnzylber et al., 2006; Nagler and Naud ́e, 2017). McKenzie and Paffhausen (2019) find that the rate of firm exit in developing economies averages 8.3 percent per year. McCaig and Pavcnik (2021) document an entry and exit rate of 14-18 percent for informal sector firms in Vietnam. These estimates are higher than the ones documented in this paper and the difference is likely due to by the nature of the data, which includes household businesses whose larger revenue scales subject them to register and pay annual taxes by law, and are thus less prone to turnover.<sup>3</sup> Our unique dataset allows us to document that an additional 25 percent of household businesses suspend their activity for part of the year, with the average annual suspension duration exceeding 2.5 months. The informal economy in developing economies has been able to weather shocks and even expand employment during past economic downturns (Loayza and Rigolini, 2011). However, informal business, many of which operate in the services sector, were hit hard during the COVID-19 shock in 2020, and the suspension rate spiked to 40 percent of registered household businesses.

We analyze the effects of the initial outbreak of COVID-19 on household businesses in Vietnam utilizing two high-frequency data sources: the tax census data, which provides information on the extensive margin of household 1Household business refers to household-owned, or family run businesses, and it is a good approximation of informality in developing economies. (Loayza and Rigolini, 2006).

> 2Commune is a third-tier administrative unit in Vietnam, subordinated to district (second-tier) and province (first-tier). There are over 11,000 communes in the country.

> 3In Vietnam, a household business must register and are responsible to file and pay one annual lump-sum tax within a fiscal year if their annual revenue exceeds 100 million Vietnam Dong (VND), or approximately USD4,300. According to the 2017 Vietnam Enterprise Census (VEC), registered household businesses comprise about one-fifth of total informal businesses in Vietnam. Further discussion on household business characteristics is presented in Section 2.

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