Not all business registrations imply new economic activity. Close to 13 percent of companies registered by 2008 were already present on the books.<sup>6</sup> By 2012, approximately 2,000 companies, or 7 percent of gross registrations, fell into this category. Potential explanations include the newly introduced Company Act (2009), which changed companies’ legal status and required them to re‐register. Companies that failed to re‐register would be excluded from investor tax incentives<sup>7</sup> and government tenders.<sup>8</sup> New registrations do not necessarily all convert into activity.<sup>9</sup> Up until 2012, about 12,000 companies, or 42 percent of the total registrations, were still inactive. Trends show that more than 80 percent of registered companies become active in the year they register, declining sharply to 14 percent after one year of inactivity (see Exhibit 11). Going by this, one can expect slightly more than 1,000 companies registered as inactive in 2012 to become active in 2013.

There are a number of possible explanations for the high rate at which companies become active in their first year of formal registration. First, it could be the result of business formalization as companies already in operation are pushed into registration and caught in the tax net.<sup>10</sup> Second, the sectoral make‐up of the companies registered may play a role. Around 40 percent of registrations are in wholesale and retail trade, a subsector in which startup capital is low and turnover is immediate. It would therefore make sense for companies to begin interacting with the tax authorities in their first year of operation.

Given the robust growth in company registrations, the large and rapidly growing number of inactive companies is not unusual. Underdeveloped businesses might have been tempted by the cheap and easy process of registration to acquire legal status.

Some newly registered companies seem to have closed. Approximately 11 percent of registered companies appear to have stopped interacting with the tax authority, having perhaps discontinued operations or slipped into informality.

This leaves the count of active companies at 41 percent of the total number of registered companies. Despite this trimming, the number of registered and active companies increased more than four‐fold from 2,700 in 2008 to about 12,000 in 2012 — or an impressive compounded annual growth rate of 34 percent (see Exhibit 11 panel (b)).

The large share of inactive or closed companies need not be a sign of concern as long as the share of active companies keeps growing. Churn is a physiological component of the economy, especially among small firms (Haltiwanger 2012). As entrepreneurs experiment with new projects, fail and learn along the way, they contribute both to the real economy and to the accumulation of knowledge.

> 6 A number of companies were found to have registered with the Rwanda Development Board (RDB) after having been registered with the tax authorities for a number of years.

> 7 See the 2005 Rwanda Investment Code for more detail on the types of incentives available to investors.

> 8 More subtle explanations also exist: for example, close scrutiny shows two large insurance companies re‐registering to comply with newly introduced regulations mandating the legal separation of their life and non‐life products.

> 9 For a detailed explanation of the extrapolation of whether a company is active, see Annex 1.

> 10 The New Times: http://www.newtimes.co.rw/news/index.php?i=15035&a=55233.

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