Another set of studies analyzes what happens once firms formalize. One of the outcomes of interest studied by recent studies is whether formal firms show increased performance with respect to informal firms. Recent rigorous experiments in Sri Lanka and Brazil have explored whether formal firms do receive more bank credit, but they have found no evidence of this: the extent of bank financing extended to formal firms, after they formalize, does not increase. Other studies have inquired whether it is access to credit, as opposed to additional credit, that would increase as a consequence from formalization. McKenzie and Woodruff (2008), using evidence from Mexico, show that relieving credit constraints leads to increased returns to capital of 20-30%, on average, and 70-79% among those firms that reported being financially constrained.<sup>15</sup> By facilitating hands-on access to the banking system, formalization seems to be increasingly attractive and beneficial to firms.

Formalization seems to be connected with higher performance. Fajnzylber et al. (2011) analyzed the impact of Brazil’s formalization program, SIMPLES. They found that formality increases firm employment by 40-50% and increases the probability of having a fixed location by a 30-50%, leading to large increases in revenues and profits.<sup>16</sup> Analogously, in Viet Nam, Rand and Torm (2012) find that firms that decided to formalize in the period 2007-2009 saw an increase in their profits and investments compared to similar firms that remained informal.<sup>17</sup> McKenzie and Sakho (2010) found evidence in Bolivia that firms that become formal issue more tax receipts and have greater sales.<sup>18</sup> De Mel et al. (2013) find that firms in Sri Lanka are more likely to advertise. Finally, in a recent literature review, Bruhn and McKenzie (2013) show that formalizing may help firms to expand their customer base.<sup>19</sup>

# **D. Investment climate: What helps informal economic actors?**

Recommended policies for the development of the informal sector depend greatly on the nature of informal firms as well as the causes and effects of informality. For example, various programs have been proposed to help informal firms, especially the smallest micro and household firms, overcome their weak access to social services. Others, noting the importance of the overall business climate, including the quality of tax regimes and regulatory frameworks, focus on these issues. Arterido et al (2007) find that a weak business environment reduces the employment growth of micro and small firms. Jacobs (World Bank, 2004) proposes a regulatory transition program that allows firms near the margin to accede to the benefits of formality while taking on the obligations gradually over time. Benin has now proposed defining a new “ _entreprenant_ status,” a simplified legal regime intended to facilitate the migration of businesses operating in the informal sector into the formal sector. These types of initiatives are discussed below.

## **1. Business services**

Steel and Snodgrass (2008) emphasize the weak access of informal actors to social services. The services of concern are those with a direct impact on productivity and from which formal firms benefit greatly, such as infrastructure, capital, education, health, and social security. These channels toward greater productivity also involve laws and regulations, as well as private sector development services,

> 15 McKenzie, D., and Woodruff, C., 2008.

> 16 Fajnzylber, P., Maloney, W. F., and Montes-Rojas, G. V., 2011.

> 17 Rand and Torm, 2012.

> 18 McKenzie, D. Sakho, Y.S., 2010.

> 19 Bruhn, M., McKenzie, D. 2013.

20